I don’t know about you - but the title above is a worrying fact for SMEs and for all businesses, but it does substantiate that well-known quote of:

"Cash Flow is King"

It is extremely easy for businesses to get hung up on making a profit, but it is critical to understand that Cash Flow is even more important than profit and that the two are quite different things. We also know that businesses can make a profit while still having poor cash flow, and vice versa. Businesses do not necessarily fail simply because they don’t make a profit or they don’t have a good product, service or offering - instead it is more likely that it is merely they run out of cash!

So, why would anyone allow their business to run out of money? The simple truth to this is that no-one does this willingly - sometimes the business focus is on the offering, the profit, the staff or the infrastructure, sometimes it can be on future deals and gaining revenue ….. but with all this focus elsewhere, there is quite often not enough of it on getting the money in!

“Business owners are often unrealistic in predicting their cash flow. They tend to overestimate income and underestimate expenses”

So, what is the real difference between Profitability and Cash Flow?

In simple terms “Profit” is the difference between Income and Expenditure - it is important to remember that here: a) Income is calculated at the time of sale, not when payment is received. And b) Expenditure is calculated at time of purchase rather than when you pay the bills.

Whereas, “Cash Flow” is the difference between actual cash coming in and going out and (unlike above) here: a) Income is not counted until payment is received, and b) Expenditure is not calculated until payment is made.

Therefore, you could say the difference is ‘just’ timing, but I would be incredibly careful about using the word ‘just’ in this situation. The timing of when money is coming in and going out is critical and therefore we know that 81% of failed SMEs ceased to exist because they didn’t understand the ‘just’!

We have all heard the expression “Revenue is Vanity, Profit is Sanity”, but not so many of us will know there is a 3rd part to that, which is intensely relevant to this article:

“Revenue is Vanity, Profit is Sanity, but Cash is King”

But there are some basic steps that we can take to ensure healthy Cash Flow and to protect a business’s financial health:

1) Project Your Cash Flow

Start with the amount of cash available, i.e. current bank balance and then make a list of projected inflows - customer payments, collection on bad debts, interest or investment earnings, etc. List not only the amount, but also when it will be coming in. Make a similar list of projected outflows - payroll, monthly overheads, payments on accounts payable or other debt, taxes payable or set aside for future payment, equipment purchases, marketing expenses, etc.

2) Do Scenario Planning

Prepare short term Cash Flow forecasts based on the different scenarios that your business may face in the coming 1, 3 and 6 months (extremely important in these Covid-19 times). Many of your customers could also be having cash flow problems, so please take this into account in your planning assumptions. The probability is that none of these exact scenarios will come to fruition exactly as planned, however the process of preparing these will focus your attention on critical areas and allow your thinking to be more agile to make the quick decisions as the economy and situation changes.

3) Assign someone to manage this on an ongoing basis

It is critical to find a diligent team member and to make them responsible for tracking monies coming in and going out (and the different scenario planning) – and to ensure these are reviewed regularly.

4) Speak to your Suppliers and creditors

Many will undoubtedly be having similar issues to you, so may not be able to extend payment terms. But discuss what is happening with you, as being honest with them now when everyone is going through the same situation will build stronger relationships and understanding. It maybe suggested that reducing credit terms for customers can accelerate Cash Flow – and whilst it will, be aware that this could very well have a negative effect on your customers (who again, are in this with you) going forward.

5) Look at Governmental Support Initiatives

There could be a whole article on this alone, as there are some great schemes available today including: Bounce Bank Loans, Start Up Loans, Coronavirus Business Interruption Loan Scheme (CBILS), Income tax and VAT deferrals, Coronavirus Job retention Scheme, Business Grants (such as RGFs, Resource and Training Grants, etc), R&D tax credits and many others… Do not miss out on a chance to inject some much-needed cash into your business at this difficult time.

6) Keep your bank informed

Keeping your bank appraised of what is happening in your business, including any unforeseen outgoings and changes in forecasts, is crucial so there are no surprises. The Government is urging banks to be supportive during this difficult period, so if you have bank financing then do speak with them to see what repayment holidays or other support they could provide.

So yesterday my 6-year-old produced some posters, tickets and decorated (to my horror) the lounge in a circus theme, so that we could all watch Hugh Jackman 'et al' in a cinema style experience of ‘The Greatest Showman’. I mention this because it reminded me of P.T. Barnum (the man not the singer) and one of his more famous mantras, which I feel is appropriate here:

“Money is a terrible master, but an excellent servant”

For those of you who did not know - as well as creating the Circus, he also wrote several books. One of which was called ‘The Art of Money Getting’ and if you read this, you will know that he believed that getting cash was a vehicle to fueling growth rather than the end goal itself. And I am sure that he would have agreed that we should all rely on Cash Flow to serve our needs, but we should never let it be the sole ringmaster which controls our destiny!

I hope that the above summary has been useful and if you need any support, help, guidance or just someone to bounce some ideas off then please do give me a shout on julianpatel@clivedenhouseconsulting.co.uk and I will do what I can to help. I can also support with simple templates for Cash Flows, Scenario Planning, etc. if required. However, above all - please look after yourselves, your businesses and your staff .... and please stay safe!