Does Cash Reign Over Your Kingdom?

Cash may be king but does it reign over your kingdom?

We’re all familiar with the phase revenue is vanity, profit is sanity but cash is king.

However, despite this being the first lesson in Business 101 you’ll be surprised to find that very few business leaders actually truly understand the relationship between their company’s revenue, profit and cash position.

Let me explain further using this simple exercise:

‘A business has a bumper period generating £100 of income which more than covers the £80 of costs it has incurred in supplying the goods/services. The company bank balance at the beginning of the period was £nil and it has an overdraft facility of £150.

At the period end what was the company’s:-

(A) Revenue

(B) Profit

(C) Cash Position

It’s not a trick question. All the information needed to answer it is contained in the above paragraph.

You’ll find (A) and (B) are easy to calculate, but (C) not so much.

[Find the answer below]

According to a survey carried out by the Department of Business, Innovation and Skills, 42% of small and medium sized businesses consider cash as an obstacle to their success.

This impediment isn’t necessarily caused by a lack of access to capital. I often find when helping clients to optimise their cash flow, working capital management – or the lack of it – tends to be a root cause of most of their cash problems.

And those using invoice financing are typically the worst culprits!

How to Optimise Cash Flow

The 3 areas to focus on when optimising cash flow are:

Payment Terms >>> We all know Goliath doesn’t like to negotiate, however, a carrot & stick approach can help ensure that you get paid on your own terms. When ‘sharpening the pencil’, why not make any further discount contingent on earlier payment terms? You’ll be surprised how effective this tactic can be. If you don’t ask, you don’t get!

Invoicing >>> Don’t wait until after the month end. Every day you delay raising the invoice will only extend the time it takes to get paid. And if you’re still sending invoices via snail mail (don’t get me started on 2nd class postage!), it’s time to invest in a system more befitting of the 21 century.

Credit Control >>> If you’ve done a good job, don’t be embarrassed to ask for your money when it’s due. Frequently allowing a few extra days for the invoice to be paid only creates a rod for your own back. If you’re the supplier that never causes a fuss, guaranteed you will always be bottom of the pile when it comes to payment.

Hopefully these tips will help make for a happy kingdom.

You can find out more about how H&Hendricks can help support your business with cash optimisation by clicking here.

All hail the king!

Ashley Bancroft, Partner at H&Hendricks LLP

[Answer: (A) £100, (B) £20, (C) It depends on working capital management! It could fall anywhere between -£80 and +£100]

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Ashley Bancroft is a founding Partner of H&Hendricks. A qualified Chartered Accountant, he also holds an MBA from the University of Chicago Booth School of Business and specialises in finance, strategy and entrepreneurship, with particular focus on value creation.