We have a cash-flow problem, shall we reduce our margin to drive sales volumes?
Cash-flow management is about how money flows into and out of your business over-time. There are three types of cash flow – operational, investment, and financing – and the one of interest here is operational cash flow. Cash-flows in from sales, and out in payment of bills, including supplier invoices, wages and rents.
Margins need to be high enough to leave sufficient cash to pay all these and the timing of inflows and outflows needs to be managed to make sure enough cash is there at the right time.
By discounting margins to drive sales, you risk not having enough cash left to pay all these bills. This is a common problem with businesses at the moment, with everyone discounting like mad to try to maintain sales, resulting in insufficient cash to pay salaries and rents. People are literally buying the work to stay afloat.
When we work with a business, we often start by looking at how the money flows through the business. A cash-flow forecast is a good way of determining this movement. So we start work by building up a detailed weekly forecast. The finance team can then see precisely where the pinch points occur and manage these – we can then measure the shortfall and either arrange for finance to be injected into the business to get them through these periods or simply move debtor and creditor days, to solve the problem in the shorter-term.
If a business loses control of cash-flow and runs out of cash, this is when everyone starts to get nervous. Paying the landlord and the staff are paramount. I hope that is obvious, without these people on side you will never get to pay back your creditors and the business will fold.
The way we work, none vital creditors often have to wait longer to be paid, but they are always kept well-informed of the situation.
Communication is key to maintaining a good working relationship with your suppliers in tough times. Chances are, during a recession, they too are going through a hard trading period.
Giving them as much information as possible will help them manage their cash-flow effectively and mean they will probably help you by giving you more time to pay them.
When times are tough other business owners will often do their best to help you, as long as you are honest and upfront about your situation.
There is absolutely no point burying your head in the sand hoping it will all go away, and it will be alright in the end.
It won’t – unless you manage the problem and face it as a challenge to overcome.
Too often I have seen businesses slowly fade into liquidation and closure because action wasn’t taken fast enough.
This is because we like to live in the past.
If I had a pound for every business owner who said; ‘three years ago a buyer offered us £x millions for the business. We probably should have sold it then!’
Too bloody right!
And then there is those that live in the future;
‘one big order and we will be back on track’
But you are where you are, now, so face up to it and move forward, no point looking back…or forward.
Cutting your margin may feel like the right thing to do to get more sales, but to turn those sales into profit and feed the hungry mouths will be a thankless task.
If anything – put your prices up! If you put your prices up by 5% the effect on your net profit is 40%!!
Here is how you can do it – http://businessinsiders.co.uk/increase-your-net-profit/
(Source : Jeremy Harbour – Harbour Club )
Other ways to make your business work again could be to cut overheads and de-debt the business through a restructuring process but a one size won’t fit all.
We aim to get the business to work on your terms – not your customers.
Everybody wants and expects a bargain nowadays, if you cut your prices once and you’ll have to do it again and again, until you are working for free.
A business should generate a profit otherwise it is not a business, it is a charity that you are personally bank rolling, or it’s just a hobby with a headache!
Time to wake up and smell the tea!
Discounting margins to drive sales is not the same as managing cash-flow.
As Lord Alan Sugar puts it: ‘Anyone can sell a tenner for a fiver’.