Cash is King for Business Success
You may think that stating “Cash is King for Business Success” is stating the obvious.
But if you look at the two main reasons for business failure identified in a major study* conducted on behalf of the UK government into business failures, particularly the failure of small businesses and start-up businesses, you begin to realise that many entrepreneurs lack basic financial management skills.
The reasons identified were:-
- No cash flow or financial management.
- Lack of orders / customers.
(In this blog we will be concentrating on cash flow and financial management).
It is not unknown for “profitable” businesses to go out of business. This happens when they simply run out of cash or no longer have the support of their bankers or investors.
There are several reasons why many businesses run out of cash including the following, where:
- The business owner or directors either take money out of the business for personal use or they buy unnecessarily expensive items for the business that the business does not have the finance to afford. Unfortunately, many people fail to recognise this (to their cost).
Example – The business receives a large receipt for a contract or order and is thereby becomes cash rich at that moment. Forgetting that the business still has invoices and other significant expenses to pay, the owner(s) go out and buy a top of the range motor car. You may not believe it – but it happens!
- Perhaps more obvious is where Stock (Inventory) levels are too high, given also a low stock turnover ratio. This in turn increases the possibility of stock obsolescence.
The stock turnover ratio is very important. We will cover this in a future blog post.
- One of the main issues for business failure, particularly for small businesses, is controlling their debtors. This is where your customers fail to pay you on time with the knock-on effect that you cannot pay your creditors (suppliers) on time. In order to overcome this problem, you may need to arrange a bank overdraft facility or increase your existing overdraft facilities. Unfortunately, this comes at a cost as you will incur additional interest charges thereby reducing your profitability.
There are actions that owners of business owners can do to protect themselves.
The most fundamental of these is to firstly put together a realistic and well researched financial plan. Secondly, have in place a simple but effective financial management process.
Remember Cash is King for Business Success.
A one- hour workshop on “How to improve your cash flow and profitability.
These will be arranged for the October / November 2020
Dates and venues to be announced
* Source: SFEDI 2007