Tuesday, 16 June 2009

It's All About Cash

If I had a pound for every time an executive said to me in the past that business is all about growing revenue and that profit will follow, I would be a rich man. Most who have followed that doctrine and planned only for growth at all costs have run face-first into not just the recession but the credit crunch too. The Perfect Storm for business.

At this point, all executives suddenly realise that cash was always king and cash comes from profit, planning and sound management. There is no worse feeling for a business facing survival to run out of cash and have nowhere to get more from. We need only look at the banks and how they spectacularly ran out of cash via credit and then exposed a whole multitude of heinous mistakes they had made which all came from looking for the next deal without thinking about what it was worth or how it was funded.

There was a time when you could have walked into a car showroom with a bag full of cash and get the best deal. Up to around a year ago, car salespeople treated the cash buyer as a leper as they got such a nice share of the profit on any lease deal that it more than compensated for the discounts they gave but more importantly super-charged their commissions. It must have been a horrible awakening when car leasing companies couldn't supply the cash any more.

In any business, the fuel which makes the whole engine work is cash. In the bad times you really know it and in the good times you should horde it. Of all companies, banks should have known this as they ram it down small business men's throats daily.

Cashflow Is King

Cashflow is the vital circulatory system for all companies. Even in the US where Venture Capital companies used to hand cash out like freebies at a computer show, now murmur the mantra about 'cash burn' which is the rate at which new companies consume the capital they have been given to start up. The heat is on when it comes to cash.

Growth, when you boil it down, is fuelled by cash. Yes, you can send out the salespeople, build a nice product, do some fancy marketing but all are the manifestation of spending cash. The recession has taught us hard lessons that every pound spent should be done so as if it were your last - make it pay back big time. But how do get cash to expand in hard times?

True, the Government has come up with Enterprise Loan Guarantee Scheme which theoretically makes it easier for a bank to extend you credit. In practice, it is just a way to guarantee up to 75% of existing loans and little new credit has filtered into small businesses. It was a nice idea, stupidly executed as usual. Meanwhile, even if you do get more credit to survive or expand, there is the thorny issue of bad debts.

It is estimated that up to 40% of small businesses have experienced poorer payments or bad debts from their customers since the start of the recession and credit crunch. Of course, this means that when you go to any bank or loan company and seek the vital loans and credit you need to expand, your cashflow looks poorer because of it. It becomes a vicious circle. In fact, the larger and more stable your customers, the longer they take to pay as they treat smaller, less important suppliers as low priority when it comes to payments.

Credit Insurance

Many small businesses have not explored the options of credit insurance. Often this is down to the fact that they have a relatively small customer base but conversely, this is when the risk is at its highest. You only need one large customer to default or pay late and cashflow really hurts, let alone go insolvent. There are credit insurers who will take on the risk of defaulting on payments but as usual, there is a catch. They need to see your books, cashflow, payment histories, past bad debts and profitability. If you are a dodgy risk, then insuring your customer debt is barmy.

Naturally, this would not have been an issue if you had thought of this before the credit crunch - insurers would have tickled your tummy to get your business. Now, they are reining in their terms and slashing cover as claims on them rise. Trying to get insurance on debt now is hard work.

In fact, even if you have been working with your insurer for a while it is no recipe for getting more credit insurance when you need to expand. They have gone so conservative, even if you have a good record with them, that they are defying good credit ratings and offering low or no cover at all, as I have found out lately at one of my clients. But you cannot do without this sort of cover in these conditions.

Growing Via Credit Insurance

My advice is to do a number of things geared around cashflow and profitability. Credit insurance is not just a safety net, it is a way to secure growth by mitigating risk and establishing a bridgehead for creditors to feel more confident about your business. If your own debt is insured then you are less likely to go bust, so more companies will feel confident to do business with you.

My tips are:
  • Renegotiate contracts with suppliers to get better discounts and payment terms. Some are offering deals on cash or prompt payments which may actually boost profits but murder cashflow - think carefully and, above all, model your business to work out your cashflow. Get your hands on a good business planning tool to work your cashflow through and see if these discounts help or hinder. If you don't know your business mechanics you will make a mistake.
  • Squeeze your customers hard. Chase payments early and even offer discounts for early settlement if need be, perhaps passing through discounts from those suppliers who offer the same or a share of it.
  • Cut unnecessary costs which release cash - don't cut for the sake of it as it often does not immediately help cashflow so choose your cuts carefully.
  • Get rid of poor paying customers or nasty low margin business. When showing your books in detail to a bank or credit insurer, the more low margin or long paying customers you have, the lower they will rate your business.
  • Don't just show them projections and forecasts - know the business intimately. Immerse yourself in every deal, think about what it will mean to cashflow, think about the risks of missing out.
  • Make sure that the deals are GOOD deals - don't go for low margin business with companies with poor credit ratings, think hard about the worth of that business as risk is the byword.
  • Think what impact it would have it you could not service that GOOD business through lack of credit (assuming your products and salespeople are good enough to close them, don't guess here). Think also about if the competition could get those deals because they are with a different credit insurer. Demonstrate your knowledge of your market by knowing what your fair market share is and so if that should slip due to poor ratings by credit insurers alone, then estimate the impact.
  • This cost impact is your weapon as you can take it as an 'Opportunity' to other insurers - don't just approach one.
  • Aim high - go to insurers at senior manager level - you need to talk to businesspeople with executive powers not paper-pushers.
  • Build trust and relationships - as with banks, business is about trusting individuals as well as the business dynamics and accounts. Make sure that you act professionally, know your subject and empathise with your credit insurers or loan companies before the hard negotiations and never sound desperate.
  • Make sure you have 'cleaned' your management accounts as much as possible before you get there. Make sure you have cut costs, implemented new supplier deals or cash management initiatives early rather having credit insurers highlight them and tell you how to run your business - it also impacts their risk assessment if they think you cannot run your own company.
  • Multiply your credit options. Don't just go for single sources of cash - think about a range of options, even if you do not use them all. Often, one source of cash management helps get another so make sure you have access to as many facilities as possible as your own insurance and be able to flex your business more easily.
  • Be transparent - the last thing you should do is be 'economic with the truth' or cover things up. Financiers have a nose for bull and so don't risk it as it ruins credibility.

Credit Insurance comes at a price and is usually bespoke to your business so make sure you opt for what you need. In the end, like any insurance, it is there as defence against the worst case scenario and will pay out if your client should go insolvent. What it will not do is necessarily improve your cashflow - that's still something you have to manage yourself to maximise.

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