In the last week I have had three separate conversations with business people and read a few LinkedIn posts about profitable, growing businesses that have either closed down or are on the verge of closure as a result of cash flow problems or in their words “not getting paid from their customers”
It is only when you see a business fail, and good people being made redundant, going home to an uncertain future and a pile of bills that they can see no way of paying, that you get a sense of the knock on effect that this can have.
As sad as that is, what I think is even sadder is that it is avoidable.
Of course, I can understand why a business that has been struggling for the past few years finds in extremely hard to turn down any new and additional business. Still, before they take on a new client, the question has to be asked “can I afford to do this?” and in most instances, the cash flow implications are not taken into account.
So, let’s look at an example: You have €10,000 in the bank and get an order for €20,000 that you are going to make a 20% margin on, that seems like a great idea. If you have to pay €16.670 for the product and your supplier requires payment in seven days and you know your customer will take 60 days credit from you. It doesn’t take an expert to predict that your business is going to fail, due to running out of cash.
As we emerge from the last recession, this is happening more and more and the vigilant credit manager will see the signs of this over-trading before it becomes a problem.
The paradox is that in the example above if the company received an order for €10,000, they would have been in a position to pay the €8,335 and the business would have survived, and they would get to realise the €1.675 profit two months later.
Yes, there are options, like invoice financing, increased bank facilities, agreed extended credit from your suppliers and additional capital investment. Each of these potential solutions require planning, and businesses that fail to plan can plan to fail.
Managing cash flow is essential, I have seen businesses with vast debtors ledgers, go out of business, simply because they failed to prioritise the ongoing collection of their cash. Waiting until it is too late and panicking.
Please take note of the content of this article, the survival of your business depends on it as does every single employee and their families, not to mention the other suppliers that have provided goods and services to your business.
With proper credit management and proper focus on the cash flow implications of every transaction your business can survive and thrive.
Declan Flood, Chief Executive of Irish Credit Management Training