Morton Fraser Business Tip- Cash is king
Charles Dickens’ Mr Micawber said:
“Annual income twenty pounds, annual expenditure nineteen, nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery”.
However if Mr Micawber’s expenditure all occurs in Quarter 1 and his income arrives in Quarter 4, then he is not going to make it through Quarters 2 and 3. Cashflow insolvency (the inability to pay debts when they fall due) is as injurious to business as balance sheet insolvency (liabilities in excess of assets). Cashflow insolvency leads to legal actions, supplier difficulties and disgruntled employees.
Control of cashflow is key to business health. It is tempting to focus on innovation, sales and growth (exciting and rewarding), but to ignore cash management (dull). Growth requires careful management and many businesses fail because they run out of the cash needed to fund increased sales.
Cash management involves knowing what you need to spend (and when), knowing what you should be receiving (and when), and planning accordingly. Cashflow forecasting is a continuous process, but on its own, it is not enough for successful cashflow management. Some necessary basic administrative tasks that need to be undertaken constantly and intelligently are:-
- knowing exactly who your debtor is;
- invoicing promptly;
- considering whether cashflow financing is desirable;
- chasing slow payers (and taking legal action when appropriate); and
- having contractual paperwork that is fit for purpose (e.g. terms and conditions need to be up-to-date and properly incorporated into your contract).
Taking time out of the business day to reflect upon, and action, some of these points can make a substantial positive difference to your cashflow.
Alan Meek, the author, is a partner in the Restructuring and Insolvency team at Morton Fraser Lawyers.