A Part-Time FD Can Help You Improve Cashflow

The Problem  

You have a 47% chance of winning at roulette and a 32% chance of winning on the slot machines and less than a 25% chance of succeeding with a new business or product.

The reality is that 4 out of every 5 businesses fail due to poor cash flow management.

It would seem logical that following on from this, every business owner would have a clearly defined and well managed strategy to avoid running into cash flow problems and have a plan to improve cashflow when problems do arise, but amazingly this is very rarely the case.

If every business owner understood the risks they face operating their business and had a strategy to overcome those risks, the business success rate in the UK would be vastly improved.

Most CEOs and MDs we meet have never had a thorough training in cash management. The creative skill set required to build a business is – for the most part – different to the skill set required to manage a business (and in particular manage the finance function within a business).

A lot of business owners our part-time FDs work with tend to feel guilty about not fully grasping finance and accounting. Of course it helps to have a certain level of financial literacy but the more of a ‘finance role’ the business owner carves out for him or herself the less time he/she has to focus on growing the business. In other words, it is almost always a disadvantage to try to straddle the roles of business builder and finance director.

As an analogy, it is rare to find a world class sportsman who plays two separate sports at international level, not because they necessarily lack the talent but because they require a level of focus and commitment to doing one thing exceptionally well if they wish to perform to the highest standard. When business owners spread themselves too thinly across the key roles in their business, their impact across each function is weakened. The strongest businesses are underpinned by strong teams, where specialists rule their particular domain.

If poor cash flow is the biggest threat to a business then why do so many businesses fail to control their cash? Well, the truth is, it requires specialist knowledge and can be complicated unless you have the right systems in place.  Each business has a different cash flow cycle. Trading patterns within a business change from month to month depending on a range of factors and it is very easy to be caught out.

Having the right cash flow management processes in place and being able to spot peaks and troughs in trading in order to improve cashflow is one of the most critical components of any finance function. If you are nervous about your company’s long term stability and have constant concerns about cash flow we would urge you to look at finding a resolution as a priority, even more so in the current climate.

Worrying about meeting payroll, paying suppliers and having enough cash to spend on marketing causes stress which can be avoided with the right reporting procedures. Failure to manage cash has a knock on effect across the business. We often take on clients who talk about feeling as if they are drowning but not having enough time or energy to fix problems.

Much of this stems from the senior team’s lack of visibility within the business. Cash flow comes under threat when decision makers in the business aren’t able to see the immediate and future impact of their decisions. So when Director A decides to instigate project A but doesn’t consult Director B and C who have also made decisions to instigate projects B and C, the cumulative impact could lead to significant issues with cash flow.

Our experienced, part-time FDs advise having a standard 9 week visibility plan over cash flow which prevents these issues occurring, promoting a much calmer and less frenetic atmosphere in the business.

The business owner often feels guilty and feels they are the cause of the problem. Employees sense that there are problems, which leads to negative rumours and a lack of perceived stability. Suppliers sense something is wrong and suddenly want paying faster, which can lead to difficult conversations. The chosen fix is often to simply sell more and yet there is not enough money in the marketing pot to boost sales.

In so many cases cash flow problems can be avoided. Good businesses go under every day because the fundamentals are not in place. In fact, installing systems to help manage cash can be done very quickly and at very little expense.  There are always risks to a business, but knowing that you have done everything you can to limit those risks will remove a huge burden off the shoulders of the CEO and senior team.

The Solution

When cash flow problems arise it is very easy to ignore them in an attempt to battle on and hope the problem will go away. Cash flow management is not a short-term fix to a problem but should be part of the fabric of the business; a systematic approach, which should underpin every business wishing to ensure long-term stability.

There are many aspects to cash flow management but by way of a summary a part-time FD from The FD Centre would work with you to:

• Review the scope of your cash flow challenges
• Work with you to uncover all weaknesses and threats
• Create  internal and external communication plans to make sure all parties are kept fully informed
• Ensure that the bank is reconciled and accounts are up to date
• Limit and consolidate your outbound payments to simplify the cash flow management process
• Determine immediate cost saving opportunities within the business
• Communicate with the bank so they are ‘on side’
• Discuss bank facilities with bank manager such as increased overdraft or other lending possibilities (you may have more options than you are aware of)
• Devise a new short term cash flow visibility plan so that decision makers can see the impact of their investment decisions in advance
• Review payments owed and devise strategy to accelerate inbound cash flow
• Review outbound payments to suppliers and devise strategy to ensure suppliers are kept happy and to limit outbound payments where possible
• Work with you to identify hidden or underperforming assets which can be monetised

Benefits To The CEO, MD And Senior Team

Failing to have a detailed and well crafted cash flow management plan is perhaps the single biggest risk a business owner can take.

As we have mentioned, cashflow is the lifeblood of a business. If the lifeblood is flowing the business has energy and is able to advance. Knowing that you have a robust plan in place, which allows you to operate within your means, and move away from a ‘feast and famine’ culture is usually a huge relief to everyone within the business.

It means that decisions can be made and checked against the cash flow forecast to determine whether they are viable. This increased visibility can be introduced quickly and can have a hugely positive impact on the whole business.
It also means that reserves can be built up gradually to give the business a cushion and alleviate the stress of not knowing what lies round the next corner.

Good cash flow management can be likened to an internal insurance policy for your business. Getting to grips with your income and expenditure and understanding where you stand today as well as in the months and years ahead gives the CEO, MD and senior team a great sense of clarity and peace of mind and we would urge every business to implement a professional cash flow management strategy in the early stages of development.

If poor cash flow management is the biggest cause of business failure it stands to reason that it should be the number one priority for every business owner.