President's Message - February 2017

Posted: 28th February 2017, 11:02am

Cash is King

Earlier this month, I was asked to provide my top tip for business owners by a local St Albans business forum.  After some careful thought, I uttered the well-used but never to be under played phrase “never forget that cash is king”. Whilst this is easy to say, it is often very difficult to achieve and almost all business failures result from an inability to generate or access cash at a time when they need it most. Indeed, while I was reflecting on this topic, I was reminded of a former business contact of mine who once told me in a mystified voice “I simply don’t understand it. The more I sell, the more I need to borrow on my overdraft!”. So, what drives cash in a business and how can you ensure there is enough on hand to meet commitments as they fall due while also growing your business. 

 Firstly, any plan to grow sales significantly will typically result in an increased cash outflow and it is important to plan the way the business will meet this need for cash. Usual funding options include existing cash resources within the business or through finance arrangements such as overdrafts, invoice discounting and loans along with other forms of third party finance.  Whatever your chosen route, it is imperative to quantify the need and put appropriate arrangements in place.

Secondly, it is critical to only agree sales and purchase terms with your customers and suppliers which your cashflow can sustain and where possible to avoid and imbalance in this area to minimise the cash drain caused by the gap between the outlay and receipt of cash. . Remember, when you agree extended sales terms you are volunteering to starve your business of cash at a cost to your business and the shorter your supplier credit terms, the more cash you will need on hand to meet these commitments.  If holding stock, businesses must examine how efficiently this stock is generating cash through sales remembering that holding on to stock for extended periods places additional cash constraints on the business and risks obsolescence. 

 Finally, be sure that the costs incurred in creating things to sell and the costs incurred in administering those sales remain proportionate and under control.  While it is important that businesses keep pace with sales growth in both the front and back office to ensure a robust and efficient operating model is maintained, decisions to increase the cost base are usually best made on the basis of firm forecast revenues. 

Remember, while costs are usually certain, revenue generally is not! 

David Clarke

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