Running out of cash in business is one of the easiest things to do. Why does it happen and what can you do to stop it? Here we look at some of the easiest ways to lose money and a few simple rules for conserving cash.
Common methods of running out of cash include delaying sending out of invoices for work done, not chasing customers for payment, losing information on work completed or delivery notes for goods sold. Not making use of credit accounts with suppliers, or paying your own bills too speedily and in cash, are also classic mistakes. Buying large quantities of materials just to get discounts or purchasing equipment with cash instead of getting a loan, all contribute to cash haemorrhaging out of the business. If you keep staff for whom there is not likely to be much work, or take on unsuitable employees who don’t work fast enough, hard enough or to your high standards and you will soon be in trouble.
Being sloppy also costs money; not checking the things you sign for, or not getting a signature for goods you deliver are common mistakes. Being seduced into prestige premises, buying unnecessary insurance policies, or fancy company cars are again classic examples of fast cash drain. Some of these things you might need, but not all of them, and certainly not the most expensive. Keep it simple.
If you don’t plan ahead to foresee your company’s needs (cultivate a friendly bank manger!) or don’t record performance on a regular basis, money will vanish. Take a big order, especially from a slow payer, and a financial crisis may loom ahead. Yes, large orders can be great, but if it has cost you in terms of materials, labour and overheads and you don’t get paid for a very long time it might mean calling in the receivers.
On the positive side there are ways to avoid all of the above disaster scenarios. Stick to some simple rules.
Remember that an order should not be seen as complete unless acceptable payment terms, as well as price, delivery date and so forth have been agreed. Terms can make a massive difference to cash flow. Invoices paid within seven days are far preferable to the common practice of payment within 30 days. Some firms might have a 90 day payment policy. Do you really want to do business with them? A sale is not complete until payment has been collected.
Pay bills only when you must! Do not buy too many supplies, even though it is tempting to get the discounts. Although items may cost more you can conserve cash and use it to pay other bills or reduce the overdraft. It is easier to borrow to buy property or equipment (because the bank has some tangible assets to claw back) rather than working capital, so fund working capital from your own pocket but use loans for the big stuff.
Take on essential staff only. Think about using temporary staff for short periods at busy times. Staff cost money, not only in wages, but also extra administration involved in employing them. They can be easy to hire but hard to fire so be cautious. Understand employment law – you really don’t want to find yourself at an industrial tribunal for wrongful dismissal.
Finally, don’t lay yourself open to theft. Fraud and theft ruin businesses. Have systems and balances in place to show where money has gone and checks to make sure the records are scrupulously kept. Yes, you have to trust people, but not blindly. Keep a very watchful eye on the all of the above and you should keep your cash flowing.
