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The money flowing in and out of your business is integral to your future right now.

I want to offer you some real knowledge about money and cashflow, right now. Let me help you steer your ship to a healthy destination.

It’s Safe To Say You Are Probably A Little Worried About Cash Right Now

Among the business owners I support, two have just bought a new car on a lease (one a Mustang!), one a new house, one spent £25k in cash on new equipment for the year in January, and another a top of the range coffee machine for the office at the beginning of March.

You are not alone. No one saw this coming. Let me reassure you that none of this is your fault.

What you always knew, and now appreciate more, is that a lack of access to cash is the reason why businesses fail.

I know of companies who have made a profit every year in business and gone into administration. I have seen a company first hand, make profit and loss (P&L) losses for multiple years, and stay in business. And I still work for them. They are going to be fine.

Did you know the first thing institutional investors look at when analysing a business is their cash in the bank. This is where the saying ‘cash is king’ comes from.

Can you guess what the first thing I do when I walk into different businesses every morning? I look at the Bank Account. I look at how much money they have got. I remind myself of how much money they had about a month ago.

It gives me an immediate overview of the health of the business, likely priorities, and maybe even what mood the boss will be in. Without having to ask anything.

That is how integral this is to the wellbeing of each and every company.

Cashflow Forecasting. Getting The Basic Right

Let me share some practical tips for what you can do. It has to start with:

  1. understanding where you are now
  2. scenario mapping where you might be, going forward

A cashflow forecast can be built with a basic knowledge of Excel. It should document how you generate cash in order to pay your operating expenses and other debt obligations such as loans.

You do not need to be an expert in your accounting software to build this.

Design the forecast in a similar layout to a typical P&L Report, with monthly columns. (I do usually employ a far better template than this, but it’s not important at a time like this).

If you are new to this, I would recommend you enter the actual figures for the past six months or more, in order to see where cash is typically generated and spent.

If cash is looking like a real problem, then you should break the next three months (at least) into a weekly forecast. Daily even, if critical.

Start with Sales. Import every outstanding Customer Invoice as a new line and make a prediction when it will be paid. Remember to include VAT.

Insert a new line for New Sales. What sales are you going to achieve in the future and make an estimate of when you will receive this money. Again, remember to include VAT.

Is there any other income you receive? Itemise this too.

Add a Total row to sum the above. This is now your forecast income into the bank / business.

Next, list out your costs. I would use your normal P&L categories as line items.

Again, list out your outstanding Supplier Invoices (Bills) that you need to settle under each heading. Now you can start to become more tactical in terms of when you might choose to pay these (but always be honourable to whom you owe money to).

Remember to include VAT.

I would recommend listing each employee on a separate line, as you might wish to play out a few scenarios here too.

Different scenarios can help you. If you are assuming this will all be over in three months, then you could be gambling your company’s future on a certainty. Nobody knows how long this will last, or what effect it will have on businesses and our evolved mindset.

What You Can Do Now?

The excuse I’ve heard the most for not paying this last week was, “I’m self-isolating and don’t have access to my bank”. That’s a good one.

Remember this, focus on the areas you can control. You have total control of the money in your bank and the payments you choose to make.

Let me break things down further now for what you can do over the coming weeks or months (and beyond).

Put a freeze on all purchasing. I know this is pretty obvious but just be certain that everyone in your company understands and adheres to this. No one is allowed to buy anything, without your new consent.

Cut all non-essential purchases. Cleaners, new apps or tech, monthly subscriptions, let’s just put the brakes on for a short while. Anything a PAYE’d member of staff can do, can do it.

Assess which of your Aged Payables (Creditors) are critical suppliers and which are not. Make a decision on who you need to pay right now, and who you could call to perhaps delay and not have it affect your customers. Please be fair and reasonable about it. This is tough for everyone.

You could consider delaying payment of the VAT element of Supplier Invoices, for those you do pay.

Base your decisions with a customer focus. Which suppliers affect your customers. It is important that you need to keep these on side.

Current orders with suppliers. Analyse them. Do you need to cancel them? If any order you have placed does not directly service a customer order then you might want to make a quick decision now.

Recent deliveries. The decadent purchase from two weeks ago, can you send it back for a refund? Obviously, be reasonable, one of my clients had very recently made a large, but unfortunately bespoke, materials order. For us, it would be morally poor to send this back. But anything you could still send back and wanted to, at least have a think.

Mortgages, rent, and all other loan repayments. Phone them. You can negotiate a payment holiday on these. If not, you could stop them anyway. One negotiation tactic is to offer to extend your lease by 3 months if they can provide you with a 3 month holiday. It’s worth a phone call even if you’re not in distress!

VAT. I don’t expect you are hearing this first, but you can default on your VAT bill – between 20th March and 30th June – until the 31st March 2021. Despite their reputation, HMRC is genuinely very reasonable to company’s wanting to stagger VAT payments anyway, so you could have been getting away with – far shorter – VAT Holidays, every year!

PAYE & NI. You could just delay paying it. If you can’t afford it right now, one might recommend this being a cost you could delay. You’ll be fined 1% per day for any late payment. Although as per VAT above, I suspect HMRC will be pretty lenient if you phone them with a plea bargain in advance.

Pensions. Personally I think you should pay this. I know of one company that won’t be. They’ll have to just make it up at a later date.

Asking customers for payment. Attempt to understand your customer’s payment terms, processes and previous paying habits. Is a PO Number always required? Who does the invoice need to be sent to and by what date? When do they usually pay?

Make a County Court claim. If you have the annoyance of non-paying customers that you don’t intend on working with again, I would suggest making a County Court claim. It is far cheaper than a solicitor’s letter, and potentially get the money in your bank, quicker too. This isn’t so easy if your customer is international. Obviously, this will affect the relationship and goodwill with your customer, so do not make this a blanket company policy!

Going forward, have a think about payment terms you might wish to offer clients.

I realised some time ago that companies didn’t consider my payment terms before purchase, so I set them at 7 days Net. Some company’s still take 15 days to pay, but it is better than waiting 30 days plus. Encourage payment terms as a part of the conversation among your customers? It is good to be open with those you work with.

If you regularly suffer from late customers payments, then you could implement a Direct Debit solution such as GoCardless. The advantage of this is it saves the customer time having to process the payment, and means you get paid quicker. A wins a wins a win.

What If You Need Money Right Now?

If you need money now, you have three options:

  1. Sell a percentage of your company for cash. The cash goes into the company
  2. Get a loan
  3. Dip into your overdraft

All three options are fantastic to have but you need to understand which is the correct option for you.

The simple advice I give to clients is, borrow the money from the source most suitable to the time period you will need the money for. If you need money for life, you need equity investment. If you need money for 1 to 4 years, take out a loan. If you only need money very occasionally, and you don’t know when then an overdraft could be the appropriate option.

Let me highlight the pros and cons of each.

1. Selling Shares (or essentially a percentage of your business)

Pros — Less risky than a loan. Technically, you never have to pay the money back! If the investment happens, and the company still goes bust, well at least you tried.

You will also likely be gaining an experienced person with an abundance of business acumen. They will be able to share a raft of ideas to solve problems and open doors too.

Cons — It could be very time-consuming, and thus possibly inappropriate if you need cash urgently.

A new shareholder is for life unless you can buy it back. It could become very expensive.

Every time you take a dividend. Guess what, they get a dividend too equivalent to their percentage stake. You need to understand this before you start paying them more than the 5% interest you would have paid on a loan. And when you sell the business, naturally they are obliged to take their percentage.

You have also now just brought in a fellow business owner, who will have their own ideas, and it might annoy you. I’ve seen this happen first hand. It can create an uncomfortable dynamic.

So in short, don’t take out a loan for life, if all you needed was money for three years.

2. Loan

Pros — Generally the cheapest way to borrow money. Far cheaper than an overdraft or an investor, plus Loan Interest is (Corporation) Tax deductible. Dividends are not. Therefore you should only be paying circa 4% of a 5% loan.

You also still own the company and can continue to manage the business in your own style.

Cons — Unlike dividends, which are optional, loan repayments are mandatory and generally have to be paid monthly, so you will have to pay the money back, with interest. This will affect cashflows for the duration of the loan. A financial commitment has thus been entered into.

3. Overdraft

Pros — It is very flexible. You only have to pay interest on the amount borrowed for the duration of the ‘loan’. The interest payments stop, the moment you’re back above zero.

Cons — It is a very expensive rate if you are planning on using the overdraft facility for long periods of time.

Let’s Bring Things To A Close

Now is a great time to improve your business acumen.

The steps and processes above are ones you could be adopting all year round, but just like every aspect of your business, it takes commitment, persistence and dedication to be consistent.

The more you get into it, the easier it becomes. Trust me, the people I work with, this becomes a habit that becomes manageable over time.

I sincerely hope my advice, suggestions, and how you can steer things back into steady waters in this unusual time, support you now and your future success.

The role of the Finance Director does not need to be a full-time overhead for someone to be committed and make a difference to your business. I share and help simplify financial performance, planning and strategic positioning for businesses who just want their world to be uncomplicated and thrive.