Tuesday, April 30, 2019
It’s the hidden costs that can hurt a business, says Steve Hutin, the managing director of Rope and Sling Specialists Ltd.
We’re all beyond business 101, but I continue to see and hear about companies, new and old, getting into trouble over finances and cash flow. Perhaps because it sounds like a cliché, business leaders ignore the statement that should be at the forefront of their mind every day: cash is king. There are a lot of complicated sciences that can be applied to the wealth and health of a company but without immediate access to cash to fund short-term operations, purchases, and other expenses, a business can—and will—go under.
It’s a startling reality that a business can go bankrupt when, based on a different set of metrics, it looks in perfectly good health. The most joyous moments in any salesperson’s working life are often when they get a purchase order on a landmark order. It might be the biggest of their career, the one they’ve coveted the longest, or memorable because it was a pleasant surprise. In some offices, people are even encouraged to ring a bell to mark their success. Rarely do the accounts department leap for joy, however. And that’s because they know better.
Fantastic, another order is in the books; without bookings, a business wouldn’t function. But what if the order, or at least the bulk of it, isn’t to be invoiced until job completion in 18 months? And then 90-day payment terms are applied? What if that customer bows to crippling cash flow problems and declares bankruptcy? The salesperson that secured the order and everyone else in the company still needs to be paid at the end of every week or month. Bills will keep coming through the letterbox. Product needs to be purchased. Vehicles must be maintained. Etc. Etc.
It’s been 13 years since I took ownership of my business and, I’ll be honest, it took that step for me to truly appreciate the value of cash. I understood profit margin (you know, the other important bit about the amount by which revenue from sales exceeds costs) but I undervalued the significance of cash. It’s true that a business can survive without making profit for a while, but to run out of cash is a death sentence. We regularly open new facilities—we currently have six in the UK—and set them a target to become profitable in three years. Some have been ahead of the curve, which is great, but none would have got anywhere without immediate access to funds.
This article might resonate most with those starting out on an ownership or entrepreneurial journey. After accepting that cash is king, the second most important piece of advice to take on board is, if you want something done, better to do it yourself, as least in those early days. This is particularly key if a person has stepped out of a corporate environment or a company with extensive human resources (HR), information technology (IT), finance, and other departments. Assuming somebody else is taking care of matters doesn’t work anymore. It’s all of a sudden about cash, cash, cash. And you’re responsible for generating and protecting it.
Much of what catches new owners out in the initial throes of battle lurks beneath the waterline. School-level business studies covers fixed and variable costs, and a lot of expense is in plain sight. Staff, buildings, products, electricity, vehicles, and so on are almost accounted for subconsciously. But what about insurances, corporation tax, value-added tax (VAT) bills? Like many predators, they’re not always detected until it’s too late. As soon as a business has more overdue bills than it can afford to pay, the trouble starts. And that’s when another bill hits and something breaks down in the machine shop. Sod’s law, you could call it.
Those unexpected expenses need to be budgeted for. Old rooftops can leak, plumbing systems fail, and car parks need resurfacing. It’s ignorant to assume a business can operate without such occurrences and there are two flawed attitudes towards this reality. The first is ignoring such expense, as these matters only get worse. A small leak becomes a big one. A pothole badly damages a customer’s car. Another tile falls off the roof. The second ignorant approach is keeping one’s fingers crossed that such incidents don’t happen because there isn’t budget to accommodate them. That’s sailing too close to the wind. Here’s comes that word again: keep cash reserves.
Something a lot of successful start-up company owners hear a lot is: “You must be pleased with how business is going.” Or: “I see you’ve got a nice new fleet of vehicles—you must be doing well.” What those compliments don’t allow for, again, is what lies beneath the surface. One of the biggest pressures on a lot of companies is the investment that has been put in by the owners or via other finance options, that needs to be repaid. Behind most expansions or investments is a hungry creditor. Growth of any significance is impossible without financial backing.
Get a crystal ball, or at least the next best thing. Plan ahead—thoroughly. Monitor trends. Note patterns. Account for everything. It’s not pessimism—it’s realism. Even the most optimistic of entrepreneurs has got to bow to cash and expenses. Write down all the possible costs that will erode revenue and, moreover, calculate when those monies will be owed. Skilled accountants will be able to manipulate the process of paying bills to a point so they’re not left short but the more creative accountancy that’s needed, the closer to the edge of a cliff that business is walking. It’s incredibly deflating if a cash reserve has been set aside to invest in expansion or growth strategy only for the unexpected to wipe it out with one bite.
A successful company with cash reserves can focus on more exciting things like growth and profit margin. With readily available capital a business can leverage that security to negotiate with suppliers of materials and product, for example. We frequently buy in bulk to get better prices, yet we order minimum quantities so we avoid the costs associated with shipping and delivery. Timing is important too. Clever businesses can create credit for themselves by taking deliveries in week one of a month and run payments at the end. It’s not rocket science, but these basic principles are not adhered to as readily as they should be.
Risk management is important, especially when cash is available to take a plunge. Again, a realistic approach is necessary. Don’t put it all on the line if failure equates to bankruptcy. That’s not courageous—it’s foolish. Calculate the losses if the worst should happen and plan accordingly. Risk is ever-present in business but I’m more comfortable when it’s preceded by calculation. Calculated risk is fundamental to success but gambling is a different game altogether and in that world, the house always wins. Show me a poor bookmaker or casino manager.
I referenced IT systems and car parks above, and it’s fitting that our latest two investments have been on both. We’re in the process of an IT overhaul, while a new car park here in Pyle, South Wales will facilitate the volume of vehicles that are part and parcel of our increased activity in the training sector. Participants need to park somewhere, after all. Rest assured that however unlikely, if all our computers explode and the new parking lot implodes, we’d survive because we always remember that cash wears a crown.
Do you need to have another look at your finances?
Thank you for reading.
Rope and Sling Specialists Ltd