3 great small businesses reveal their cashflow rules to live by
Even good companies get caught in sticky situations, so we spoke to three who revealed how they avoid the dreaded cashflow crunch
Cashflow is the tripwire over which many apparently flourishing businesses stumble at one time or another.
It’s a tripwire that may not be immediately apparent. Think of it this way. You’ve worked out your monthly costs – including wages – and they are more than matched by sales. You are in profit and everything in the garden is rosy.
But if you focus solely on the sales/costs equation you can find the day-to-day reality is a bit less comfortable. For instance, if you extend credit to customers by invoicing them and allowing a set number of days – say 30 or 60 – to pay then there will be a gap between a sale being secured and a product delivered and the cash from that transaction arriving in your bank account. Meanwhile bills still have to be paid.
And if the money coming in and money going out of the business are not aligned, you can find yourself in the frustrating position of hitting or exceeding all your sales targets while finding there is little actual cash in the bank. Suddenly it’s a real struggle to pay those bills. Put simply you don’t have the liquidity you need
That’s why good cashflow management is vital to the success of a business. It is, of course, of paramount importance to keep a sharp focus on costs and sales figures but in parallel, you need to ensure you have the cash you need when you need it.
So how is that achieved? We’ve talked to three great companies that have put cashflow management at the heart of their business operations.
Founded by Neil and Laura Westwood in 2006, Magic Whiteboard enjoys sales of £1.2m across 20 countries. The company’s success was initially driven by sales of an innovative ‘whiteboard on a roll’, which provides its users with an easy and very portable means to deliver visual presentations. Building on that core offering, Magic Whiteboard has since developed a range of complementary products, including ‘magic notebooks,’ ‘magic blackout blinds’ and whiteboard-friendly retractable blinds.
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And as Neil Westwood explains, Magic Whiteboard’s management team have always placed a high priority on cashflow management. On the “money out” side of the equation, the company’s philosophy is to pay bills immediately. “We don’t like to get things in a mess,” says Westwood. “So we pay all our bills straight away.”
On the other side of that coin, the company takes a proactive line on ensuring that it too gets paid on time. “We do extend credit and at any one time there is an average of 150 companies that owe us money,” he adds.
There is a robust process in place to manage the collection of debts. Two weeks after an invoice is sent out the customer is sent a reminder and after 30 days, if the bill is not paid, the debt is chased by phone.
Magic Whiteboard also keeps a close eye on its own “credit control” performance. “If the number of people who owe us money rises above the average to say 180, we know we have to be more proactive,” says Westwood. New customers may be asked to pay in advance.
To underpin this system, Magic Whiteboard uses a Sage accounts package, which provides visibility on the key figures – such as debts outstanding, who has paid, and when. “At the end of the day it saves you time,” says Westwood. “You’re not dipping into spreadsheets.”
Cashflow management rules to live by
- Pay bills straight away
- Chase invoices two weeks after sending
- Send a reminder after 30 days
- Ask new customers to pay in advance if debtors book is above ‘normal’ levels
- Keep key figures visible – outstanding debts, who has paid, when
Blue Eyed Sun
Launched by Jo Corner from a bedsit in Brighton in 2000, Blue Eyed Sun has established itself as one of Britain’s leading providers of handmade greetings cards.
Initially the cards were created on a small scale, with Corner firing glass enamel on copper on a hobby kiln in her home. The business began to gain real traction when she took on sales agents across the UK.
Effectively this transformed the business, allowing her to sell in much larger quantities. As husband Jeremy Corner – who joined the company to help with marketing – explains: “Today we are one of the leading handmade card companies and one of the most well regarded publishers in the UK, selling into many of the top UK retailers and shipping to 16 countries worldwide.”
With 16 people on the payroll, the company has diversified by launching a wedding stationery brand called Ivy Ellen.
Jeremy Corner stresses the importance of cashflow management. “I still track cashflow every month,” he says, “Every good business person I know does this. If you didn’t it would be like flying a plane without looking at any controls. It makes running your business a lot less stressful.”
And in addition to ensuring the business has the money it needs, Corner says a robust approach to cash management has helped it in other ways, not least borrowing money. “Having good controls in place has made it very easy to borrow money when we have needed to. Our bank, NatWest, has been very supportive,” he says. “We have continually reinvested in the business which helps lenders feel reassured when we borrow money to facilitate expansion or acquire new premises.”
Blue Eyed Sun is a seasonal business and enjoys sales spikes in September, October and January. As such an important aspect of the cash management process is careful planning to ensure there is money available when required right through the year.
In particular the company has to remain aware that customers pay between 30 and 60 days after receipt. “We draw a lot less money out of the business than it makes each year, so there is always some cash available in an emergency,” says Corner.
Blue Eyed Sun also runs a tight credit control ship. “If customers don’t pay by a certain point (or make a repayment plan with us) the details go to our solicitors and they run the risk of a CCJ (county court judgement),” Corner adds. This has significantly reduced bad debts.
The company uses a Sage accountancy package to track cashflow. “It has been an invaluable tool for us in keeping on top of credit control. We also use Sage to check if bills are paid before shipping second and third orders. This is a big help with making sure the cash keeps flowing,” says Corner. “Making credit control systemic takes the stress out of it.”
Cashflow management rules to live by
- Track cashflow every month
- Use good controls to gain the bank’s trust to borrow for growth
- Plan for seasonal spikes by leaving cash in the business
- Use solicitors to threaten legal action for slow payers
- Monitor debtors and don’t ship additional orders from a customer until bills are paid
Based in Cambridge, Sookio is a digital agency, currently specialising in content creation, training and strategy. As founder Sue Keogh explains, the focus of the business has changed in the years since its launch.
“We were founded in 2008 and largely focused on creating web and social media content, but have adapted to demands of our clients and are offering more and more training and strategy to support in-house teams,” she says.
And by adapting to the Market, Sookio has successfully built an impressive portfolio of customers, including Toshiba, the Drinkaware campaign, the University of Cambridge and Government Digital Services. Meanwhile, it also works with many of the local companies within the Cambridge technology cluster.
Sue Keogh says she learned very quickly about the importance of cashflow. “It’s a key part of our success,” she says. “I learned early on that invoices have to be chased, and chased early! Particularly once I started to take on staff; if you don’t have cash in the bank you can’t pay salaries.”
On a day-to-day basis, Keogh says cashflow management is largely about getting people to stick to payment terms and settle invoices within the agreed timeframe. “It can be difficult sometimes with large public sector institutions, who have very lengthy payment terms, so you’re doing a lot of work up-front but not getting paid for a couple of months,” she says.
There are ways and means to speed up payment. “We try, where possible, to invoice for a percentage at the start of the project, then break it down so at least we can stagger the payment a bit,” she says.
Keogh has built in a robust process to enable her and her team to stay on top of the cash situation.
“My bookkeeper keeps me regularly updated about who needs chasing, and we check the bank account daily and do cashflow forecasts to keep on top of it,” she says. “You need good accountancy software in place to do this so you know the information is up-to-date and accurate before you start chasing those late payers – could be embarrassing if they point out they settled the invoice weeks ago!”
Cashflow management rules to live by
- Chase invoices early
- Invoice for a percentage of the fee upfront
- Communicate with the bookkeeper regularly
- Check the bank account daily
- Get good accountancy software
This article was produced in association with Sage One. For more business insight and tips to keep on top of cashflow and small business tax visit the Sage business blog http://uk.sageone.com/blog/.
For a free trial of Sage One please visit http://uk.sageone.com/products/.