Great sales could ruin your business

Can you be disastrously successful? You need to know when to stop selling to survive, says My Financepartner’s Tony Price

You’re clear through on goal, only the keeper to beat, certain to score. All ready to wheel away in ecstasy. Then, from nowhere, a tug, your shirt stretches out behind you, momentum interrupted, the moment gone as the keeper gratefully scoops up the loose ball. You’re outraged – and so you should be and in sport, the outrage would be justifiable. But step out of your striker’s boots for a moment…

You’re a CEO of an ambitious growing business, you’ve received a huge and completely unexpected sales order, and your revenue for the year will hit unprecedented levels. Do you take it?

Instinctively, yes, absolutely. But have you really thought about the implications? Say yes and the optimist in you will tell you you’ll be able to fulfil the order somehow, with a bit of extra graft, and the additional profit will take the business to new heights.

It’s what most business owners would think or want to believe. But if you haven’t planned for it and thought through the full implications of taking the order, the result could be catastrophic.

Over-trading kills profitable, growing businesses

Businesses that fail can often be profitable and growing. You can be disastrously successful. You can sell, sell, sell, but if you haven’t thought through your funding position, you are likely to fail.

The metaphorical tug on your shirt, incidentally, might feel like the most frustrating thing in the world, but it could just save your company.

The point is, you and your business need to be in a position ready to say ‘yes’. So how do you do that? You need a plan and a budget. This plan needs to set out what you are going to sell and to who, what you are going to need to buy, who you are going to employ. The plan should also set out planned cashflow and funding requirements.

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Getting this right is a challenge for all sizes of business. But remember – nobody can predict the future with certainty. When reality is different to the plan, good businesses will understand this and will make decisions. Where projected sales are less, adjustments to stock levels and spend are obvious. When sales are higher, the levels of working capital required should be reviewed and adjustments made.

This is where too many UK businesses fail. Extending more credit to customers cannot be done at the expense of employees or suppliers. When will you get paid is a key question that must be addressed. And don’t assume you will get paid as before or even at all!

Truly understanding what’s happening in your business and knowing what information is relevant is vital in order to make critical decisions. Planning isn’t only key, it’s essential. Plan well and plan for the future.

Identifying what your working capital needs are today or will be in six months or a year is crucial, so that you have time to organise funding. Simply saying ‘yes’ and then spluttering as your under-resourced team flounder, your suppliers get upset because they haven’t been paid on time, and your key customer walks away unhappy isn’t a scenario you want to entertain.

In my experience, businesses in such situations often point to lenders and funding institutions and say they were unreasonably refused the finance they needed. But in many cases they are reacting to unplanned events and have not presented a good case for lending. Responsible, well planned and funded growth is by far the best approach.

Take control of your growth

A conundrum all businesses have is ‘what am I going to sell next year, to who, at what price and when will I get paid?’ Owners will either take a stab at the number or will rely on optimistic views from their sales team.

Whether you’re a service-based business, a wholesaler, or you manufacture, you need to speak to your customers. Our British nature often means we don’t like to demand payment and it’s hard to stop supplying a good customer.

However, communicating with customers about their plans for the year ahead and how you might be able to help will enable you to build a picture. Ally that to the sales orders you already know about and then you can work out whether you can afford to supply them. The key is to be in control. As soon as you receive an unexpected order this should trigger management activity to look at your working capital base.

What raw materials will you need to fulfil the order? How much employee time will need to be allocated to it? What do you owe your creditors, the bank, as well as your VAT and PAYE payments, all of which need to be made on time. Factor everything in.

All business must know who owes them money and monitor payments daily. Someone senior needs to approve all new orders from customers with overdue accounts. Weak excuses should not be tolerated.

Regular management information should include details of the order book, what is owed to you and how old the debt is, what you owe to your suppliers and a minimum 30 days cash forecast that can see cash level risk before it becomes an issue.

With modern affordable technology and accountancy software packages, there’s really no excuse not to capture all the relevant information at source in an efficient way. Providing you then learn to understand how to use the data at your disposal – or have somebody on hand who can advise – you can be in control and know whether to say ‘yes’.

Because nobody wants to be disastrously successful!

Tony Price is a partner at PwC and leader of My Financepartner, the professional services firm’s cloud enabled service that delivers next generation accounting, compliance and insights for small and medium sized businesses.


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