The common problems are:
Your customers aren’t paying on time (or at all)
The volume of sales are too low – not covering your costs.
Your margins are too low, meaning your not making profits.
Your debts are too high, i.e. there is insufficient profit each month to fund repayments to either banks, suppliers or investors.
Short term strategy
Very often this is a situation which develops over time, and often it’s a combination of all of these problems.
Clearly you’ll need to decide on a strategy to deal with the short term and essentially there are two options. The first is to inject more cash into the business and thus pay all your creditors, the second is to pay some of your creditors and ask the others to wait. It is often useful to think about priority and non priority debts.
Priority debts are items such as your employees’ wages, and suppliers who will stop supplying if you don’t pay their last invoice which means you can’t function: your internet provider etc; with other suppliers you may be able to negotiate some extra time.
However, already your focus is away from the business and onto juggling creditors, it’s not a good use of time and it soon leads to dreading the phone ringing rather than hoping it is a new customer. It can be necessary, however, as a short term stop gap while you work out the causes of the cash flow crunch and how you are going to deal with it.
Longer term strategy
The first thing you really need to decide on is if the business is viable. There are two very important reasons for this. The first thing is that if the business isn’t viable you don’t want to be investing any of your own or anyone else’s hard earned cash because it will not be returned.
The second reason is that if it is clear to anyone looking at the business objectively that it is not viable and you carry on trading and subsequently lose your business, you could also lose your directors limited liability and become personally liable for the business debts.
So how to decide if the business is viable? There are no hard and fast rules, but there are two simple questions.
Is the business profitable now?
Could it be profitable?
Are you making a decent profit on paper, ie if people paid on time there would be no problems? If this is the case then much of the solution lies in getting your credit control in order. If you are making decent margins then it is worth considering outsourcing this function to a specialist that will chase your invoices. You can also consider factoring, where you sell on your order book; but look carefully at the small print of the agreement.
Has the business ever been genuinely profitable? You may think this is a silly question but you’d be amazed the number of businesses we see that have never made a significant profit even though they have traded for many years. Frankly if you haven’t made a profit for the last three years, it is unlikely to change without some radical surgery, and it is probably time to call it quits.
If the business used to be profitable or if it’s a new business, then it is time for a cold hard look at the situation. Fundamentally there are going to be two reasons for lack of profitability. The first is due to the market conditions. It may be that your business is simply never going to be viable. This might be because the cost of sales is too high, or because you are unable to match the margins of others in the marketplace. A good current example is retail where many sectors, are finally after all the hype, going online thus making high street retailers struggle in many sectors and small independent suppliers and retailers lose out. If the business fundamentals simply don’t stack up it could be best to close down the business. There are a number of ways of doing this efficiently, which we’ll look at next month.
The second reason for lack of profitability is the way the business is run. If many other people are running small successful businesses in a similar marketplace, then if your business was handled differently, then perhaps it could be profitable too.
Look at the past year’s trading; if your situation has been gradually deteriorating over the last year or so, what is the reason? Which of the common problems causing the cash flow problems we looked at are yours? (ie no payments, volume, margins, debts) Are there solutions?
How to decide whether to carry on?
It is time to make that call. Are you going to invest further in the business or it is time to call it quits? How do you decide?
There are lots of expensive complicated methods and metrics, but I’d recommend keeping it really simple.
Gather as many facts together as you can, not too much detail, but facts:
Profit and loss for recent months and recent years
Totals of creditors,
Totals of your debtors,
Totals in the order book.
Cash-flow over the last three months
How much investment can you provide and by when if you decide to carry on
Which of the Common Problems apply and their solutions
Any evidence of what is happening in your industry, in your marketplace
Ask the opinions of your bank manager and accountant etc if you think it would be useful, in advance of a meeting. Then get away from the business with someone whose judgement you value. I’d argue, perhaps controversially, that someone with business nouse and common sense is more important than whether or not they belong to a professional body.
Give yourselves three hours – turn off the phones.
Try to establish the facts about the business and how it has performed and the market you are involved with. It is highly important not to believe your own marketing spin, but also not to understate any genuine positive factors.
Then it’s a question of simply making a decision. Often it’s a question of judgement; if I’m facilitating such a discussion, as well as looking at what the facts tell us about the viability of the business, the degree of energy and enthusiasm of the directors is of equal importance. If you don’t have the commitment, drive, energy and time to make the business successful it’s much better to be clear about that and agree an exit strategy for the business, rather than fool yourself. The byword is honesty when making the decision.
You can really boil it down to three questions
Do we believe that this can be a genuinely profitable business?
Do we genuinely have the time and energy to make it happen?
Do we have access to the necessary funds?
If the answer to all three is yes, then go for it. You’ll need a clear plan of campaign on how you’re going to make it happen but you have a clear direction.
If the answer to any is no then it’s time to call it a day and look to an exit strategy.
When you’ve made the decision, stick with it. The hardest decisions are often when it is really not clear which is the right strategy. Well, if it really wasn’t clear, but you’ve made a decision, then that decision was as good as any other, so don’t beat yourself up about it. Remember the worst decision is usually the decision not to make one.
So many business owners struggle to make clear decisions and drip feed their businesses from personal funds. A report by the Federation of Small Business shows that 21% of business owners regularly fund their businesses from personal credit cards.
Take control and be clear where you are going and why.
Next month we look at alternatives if you can’t carry on as you are. However if that’s your situation and you don’t want to wait a month why not call me at Cashflow Dr or an email for some free advice.