![]()
1 INTRODUCTION
Living in Monaco is a man who puts cash at the top of his list. He holds the record for turning a company around from suffering a minus valuation to being worth over ÂŁ1 billion in the shortest time. His name is Sir Philip Green. In 2000, he bought an under-performing retail chain, BHS, and within a year declared profits of over ÂŁ100 million, making himself a billionaire in the process. Just a year later, he bought another company, Arcadia. You may not have heard of it, but you will doubtless have heard of some of the High Street names it owns, which include Dorothy Perkins, Topshop, Miss Selfridge and Burton. Within two years, Green announced a 95.8% increase in operating profit and reported that he had repaid all the loans he took out to buy it.
Quite a businessman, and yet one not in the good books of the City investment trusts and pension companies. Why? Because he doesnât make money for them, he makes it for himself! On the other hand, the banks that lend him money love him. He is a good risk who repays them quickly so they make money safely, and all banks like that.
Wouldnât it be great to be loved by the banks? Especially if they kept offering you money when you didnât need it? So, what is his secret? What makes him so special that he can make all this money? He is very open about it, and it isnât rocket science. It is, however, good cash management. Basically, if you manage the flow of money and the creation of cash, profits will follow. Remember: a profitable company can go bust while one with a positive cash flow wonât.
Once you start thinking like David Jones did, youâll look at your business differently and eventually youâll be able to stop worrying about those time-wasting calls from the bank manager. Why? Because there simply wonât be any and youâll only use the bank for cheque processing. You wonât need an overdraft, either. Freeing yourself up from these worries will give you time to work on letting your business make money.
âThink cashâ is management practice, not management theory. Itâs a proven method of running a successful business. Itâs about going back to basics, and in essence itâs very simple. It revolves around:
getting your money in quicker
making better use of that money when you get it
not paying it out too quickly
Whatever size of budget you manage, these principles are key. For example, some years ago, John Madejski, the multi-millionaire former owner of Auto Trader and owner of Reading Football Club, took part in a television documentary, which saw him swap lives for one week with a single mother who subsisted on benefits. First, the single mother stayed at his vast mansion with her children for a week, which everyone enjoyed. The really interesting bit, though, came when he went to stay with her for a week. It was a revelation to him that she was an accomplished cash manager, surviving on a very limited weekly income and managing it sensibly.
She knew how much money was coming in each week, but she also knew that each week she would need to spend more. Life had taught her that it was only by clever cash management that she would solve the problem of finding enough money to feed her children. How did she do this?
She couldnât increase her income as jobs werenât readily available, and even if she found one, it would mean that she would have to leave her children with someone else and her additional income would end up paying for a childminder. So she looked at her expenses and discovered the cash savings that would enable her to feed her children, and feed them well, while staying within her budget. Each night she knew exactly at which supermarket and at what time they would be cutting the prices of their fresh food, and she was able to feed her children on it at a fraction of the cost that John Madejski spent on coffee in his mansion!
This is an example of excellent cash management. The single mother analysed her cash, matched her expenditure to it, and in so doing, improved the quality of the food for her children. This always appears to be a benefit, as quality always improves when you start to think in this way.
Itâs not rocket science, but rather the simple management of the money available to you. Unfortunately, because the minutiae of running your business ties you down, it is easy to lose sight of these basics.
This book is intended to make you think of your business as a cash generator, creating opportunities to release the cash that is already in your business, creating more wealth for you. It will show how, by using the principles of sound cash management, it is even possible to borrow money at 0% interest. Once you start looking at your business solely as a cash generator, you will prosper and be on track to make the profits youâve always hoped for.
![]()
2 WHEREâS THE MONEY?
Experience has taught me that you can find money in every company; fair enough, itâs unusual for it to come from a petrol tank in the yard, but the funds are actually flowing through the business. The âthink cashâ principle releases this money so that you can use it effectively to build your company. You do this by maximising the use of every single penny running through your company.
Look at it like this:
the money moving through your company is called your âcash flowâ cash comes in from sales and goes out to pay expenses (including suppliers), so some cash is constantly on the move a positive cash flow occurs when there is more money coming in than going out a negative cash flow occurs when there is more money going out than coming in When you have a negative cash flow, you have to borrow to keep your business alive. This is not always wrong or dangerous, but you must have planned for it and you must know how long the negative cash flow situation you are borrowing to survive is going to last. To work this out, you need to know:
when this negative cash-flow period is going to happen why it happened in the first place how long it will be before it corrects itself For example, when a company starts up it will usually experience negative cash flow for several months. The reason is obvious: it takes time for sales revenue to reach a level where the money coming in covers that which is going out. Similarly, when you borrow to expand your business, there could easily be several months of negative cash flow before the benefits of the investment turn your cash flow positive. In all these situations it is essential that the speed at which you are burning through the money â known as the âchurn rateâ â is correctly monitored.
To be honest, this should have been taken into account and calculated before you started your company or embarked upon any expansion, but many companies donât bother. Normally, somebody gets an idea, jots down a few figures on the back of an envelope, sees a profit, gets all excited about the opportunity that has just opened up and forges ahead without sitting down and planning it properly and working out the flow of money.
However itâs happened to you, though, when your business is running with a negative cash flow you must turn it into a positive cash flow as soon as you possibly can. If you donât take action, youâll go under.
So letâs go back to the money in your company. Where do you find it? And once you have found it, how do you release it into the business to put you on the road to positive cash flow? To begin, look at your debtors â the money owed to the company.
Debtors and creditors
Every company is owed money, so every company has debtors. In fact, there is no point in going into business unless you create them. Even your local corner shop has debtors, they are those customers who have bought things on credit or with a credit card. Remember that the money from credit card purchases can ...
