Cash Management

Making your Business Cash-Rich...without Breaking the Bank

Tony Dalton

• Publisher: A&C Black Business Information and Development
• Year: 2011
• Print ISBN: 9780713677065
• eBook ISBN: 9781408139851
• Edition: 1
• Topic: Business
• Subtopic: Small Business
• Index: Business

The...on a Shoestring series helps small business owners grow their business imaginatively, effectively and without spending a fortune. Aimed at entrepreneurs with plenty of vision and commitment but not a lot of cash, each book will be packed with ideas that really work, real-life examples, step-by-step advice and sources of further information.

If you run your own business, keeping an eye on your cash is one of your most important tasks. It's much more than knowing how much money you're making (or not), but when it's due to come in, who is due to pay... and who hasn't. Chapters in this revised edition include:

• Understanding cash flow
  
• Knowing where the money is
  
• The rules of credit management
  
• Reducing debtor days
  
• Influencing non-paying or slow-paying customers
  
• Managing stock

'a great little package' The Bookseller

1 INTRODUCTION

If you have a monthly turnover of £20,000 and your customers pay you in 45 days you need £30,000 in cash just to keep going.

If you get your customers to pay you in 30 days you need £10,000 less.

But get them to pay you in advance and you are using their money!

That is the principle of Think Cash.

The problem is when you run a small business, you’re working so hard that you simply don’t have the time to cover all aspects as thoroughly as you would like. It is hardly surprising that you don’t have the time to Think Cash.

That is, of course, until you don’t have the money to pay your bills, then you need to Think Cash.

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 £1 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 £100 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 doesn’t 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.

Wouldn’t it be great to be loved by the banks? Especially if they kept offering you money when you didn’t 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 isn’t 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 won’t.

Here’s another illustration from the High Street. In 1986, David Jones was chief executive of a mail order house, Grattan, which merged with the fashion chain Next. Next was one of the retailing sensations of the decade. It had been created by the charismatic George Davies, who at that time was still chief executive. After the Grattan merger, David Jones became Davies’s deputy. Unfortunately, once he had taken up his new position, he found that over an 18-month period, Next had declared profits of £100 million to satisfy the stock market, but even with these perceived profits it had an actual cash outflow of £250 million! David Jones knew this couldn’t continue, because if it did, Next would inevitably go bust. This led to a highly public boardroom clash, resulting in the departure of George Davies. Jones took over and turned the company around by putting cash management first.

Once you start thinking like David Jones did, you’ll look at your business differently and eventually you’ll be able to stop worrying about those time-wasting calls from the bank manager. Why? Because there simply won’t be any and you’ll only use the bank for cheque processing. You won’t need an overdraft, either. Freeing yourself up from these worries will give you time to work on letting your business make money.

‘Think cash’ is management practice, not management theory. It’s a proven method of running a successful business. It’s about going back to basics, and in essence it’s 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 couldn’t increase her income as jobs weren’t 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.

It’s 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 you’ve always hoped for.

2 WHERE’S THE MONEY?

Some months ago, we ran a cash management course at a successful company that was looking for money to buy a new building. We arrived, met the management team, and started to explain to their sceptical staff the ‘think cash’ approach and the principles behind it.

We explained that, with our help, they were going to find the money required from within their company. The team looked doubtful, but to get them involved, I started off by asking what money they had in the business. After some interesting – but frankly useless – suggestions, the most junior manager said, ‘Well, we do have a tankful of petrol in the yard that nobody uses. We could sell it for more than £5,000.’ It broke the deadlock and helped them look at other areas of their business where there was money. By 5.00pm they had found £63,000, but by that stage they weren’t sure that they wanted to spend it on a new building after all.

Experience has taught me that you can find money in every company; fair enough, it’s unusual for it to come from a petrol tank in the yard, but the funds are actually flowing through the business. The ‘think cash’ 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 ‘cash flow’

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 – known as the ‘churn rate’ – 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 don’t 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 it’s 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 don’t take action, you’ll go under.

So let’s 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 – 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 ...

Table of contents

• Cover
• Title Page
• Contents
• Foreword
• 1. Introduction
• 2. Where’s the money?
• 3. The cash-flow chart
• 4. Maximising your assets
• 5. The business plan
• 6. Getting paid more quickly
• 7. The order is only complete when it’s been paid for
• 8. The rules of credit management
• 9. Not only, but also . . .
• 10. Making debt chasing an extension of your sales operation
• 11. Reviewing your terms of trade
• 12. Protecting yourself against slow or non-paying customers
• 13. Working successfully with creditors
• 14. Controlling stock
• 15. The 10% rule
• 16. Staff: A warning
• 17. Reducing your cost of sales figure
• 18. Good debt/bad debt
• 19. Improving your relationship with the bank
• 20. Zero-interest borrowing
• 21. Have you ever heard of . . .?
• 22. Discipline
• 23. Think cash!
• Imprint