Why Cash Flow is King
The main reason why a business is forced to stop trading is because it has no money left to pay its bills. And as we know at the moment, there’s a point when the banks stop lending…
Cash Flow is pertinent right now. Even the banks’ cash isn’t flowing; the money they have lent is not being repaid, so they don’t have the cash to lend again. This is their business, so they’re in crisis. The government would have to pick up most of the tab if they went under anyway, so it’s better to keep the banks alive now and keep people in employment. The alternative of letting the banks fail is probably so frightening that there is no other real solution.
So what, actually, is cash flow? A supplier provides a product or service for which it charges a price and raises an invoice. It may or may not get paid immediately. In the case of a shop we hand over cash or a card and the shop sees the money in the bank in a few days. However many customers expect to pay for products and services several days or weeks after the invoice is raised, which is known as giving credit. Most suppliers expect, or hope, to be paid within 30 days of the invoice being raised, but many customers will stretch the time as far as possible. It is a sure sign of trouble if the payment pattern from a customer changes significantly.
"If you can speed up your collections and slow down your payments, you will see more money in the bank"
Most businesses will do both. They will give credit to their customers and take credit from their suppliers. How fast you collect the money from your customers and pay your suppliers can affect your cash flow enormously and most of the time the amounts of money involved stay quite stable. A good ratio is 2:1; you are owed twice as much from your customers as you owe to your suppliers. This ratio shows the strength of the company and the skill of the management. If you can speed up your collections and slow down your payments, you will see more money in the bank and/or less borrowings. In both cases you’ll have more available to survive bad times and you should achieve a higher profit as you’re paying less interest on borrowings/ making more interest on deposits. This release of cash also allows you to fund new projects without borrowing more money.
Because of the vital lifeblood that is cashflow, it makes sense to spend time getting to grips with how you can improve the cash flow in your business. Do you know how much you’re owed (Debtors Ledger) or how much you owe (Creditors Ledger) on a daily, hour by hour basis? If not, it can be difficult to control your cash flow. I ran my own businesses for nearly 40 years and having this information at our fingertips was a real challenge for our accounts department. There were also times when getting agreement on what was owed between us as trading partners could be quite difficult. Keeping these issues under tight control made the business much easier to run.
In this digital age I can see no reason why all this information can’t be stored on a secure server, accessible all the time on the internet. Banks have done it for years, so why not businesses? Most companies keep their Debtors ledger up to date, to see the status on their customers. They may be less diligent with their Creditors ledger, but even if it’s up to date, can they get at it when they need to?
Your sales ledger may be your most valuable asset, you don’t want to lose it. Control and improve your cash flow and you’ll also increase your profits. Over the last two years we have developed a useful business tool called Transtrac, to help with this problem. If you would like to know more about Transtrac, do get in touch with me.
This article was originally written for Chichester Observer Business Matters section, March 2009
About the Author
Robin Hamilton has been running his own businesses for more than 35 years. Most of the time manufacturing office furniture, employing up to 150 people. He has been a businesses mentor since 2005.
About Transtrac
Transtrac is an online invoice delivery, tracking and credit control system that automates the time-consuming process of managing your cash flow.
For a demonstration of Transtrac, please visit transtrac.co.uk