Cashflow and why I successfully helped to make a company a lot less profitable

Welcome to my second blog. For those that read my first: Brexit: Don’t’ Panic these blogs are designed to entertain, inform and give you my opinions as they relate to OMBs (Owner Managed Businesses.

I continue in my belief that we should not panic over Brexit, as after all there is nothing we can do about it. But that does not mean that I don’t believe there will be challenges ahead.  So in these times of uncertainty what should we as OMBs do?  Well for many years I have been promoting the idea that owners should be aware of the important numbers in their business.  Indeed without knowing the numbers I really don’t know how you can monitor whether you are successful or not.  Several years ago I wrote the ‘Insight with the Numbers’ system.  This is a comprehensive outline for how we at Insight believe you can go about systemising the process of monitoring your business.  But remember the important point is that you only monitor things so that you can take action to improve and grow your business.

Today though, I want to focus on just one area that we cover in the Insight with the Numbers system.   And that area is cashflow.  In uncertain times it is in my opinion that cashflow is the most important thing that you should focus on.  Sure if the cashflow is fine – or at least manageable – then there are lots of other things to consider.  But managing your cashflow is the first step. Sadly I still hear OMBs stating that their cashflow is ok because they have money in the bank. But the reality is that having money in the bank at a particular point in time does not mean anything.  I want to recount an example from the past to demonstrate why thinking about your cashflow is so important.

Back in the dark days when we were in the middle of the financial crises a few years ago the banks were very helpfully reducing businesses overdrafts and downgrading the value on security they held so that they could call in loans and funds (yes I am being extremely sarcastic).  At this time I was introduce to a company in the construction sector who were having such difficulties.  They frequently had £300k - £400k in the bank but also could easily go up to their overdraft limit of £400k and that could happen within a day.

Form chatting to them and looking at the figures it was apparent that they were overtrading – a common problem with OMBs.  Overtrading occurs when you expand the business quicker than you can generate positive cashflow.  But much more importantly this was exacerbated by the bank giving them 2 months’ notice of withdrawing their overdraft facility and calling in loans. In addition this was all happening just when their corporation tax was due based upon their record profits from the previous year!  When I met with the client we started talking about their cashflow.  It was obviously the number one priority!

It was clear with the pressures from the bank, HMRC, wages and suppliers in general that within a short space of time they would not be able to continue to find funds to meet all their liabilities as they fell due.  They were faced with the prospect of having to wind up what was actually a very profitable business.  They described these days as the worst they have experienced in a long businesses career.   It was obvious things needed to change and fast if they were to continue.  But they also needed to keep their commitments to their customers so that they would continue to get future business. 

Working closely with the client we put together a 13+2 cashflow forecast – the template for which is now part of the Insight with the Numbers system.  This shows the projections for the next individual 13 weeks plus an additional 2 months at the end. Later on for this client we extended this to a 17+2 model to cover 6 months – but you have to start somewhere! Meanwhile the ever helpful bank was asking for 24 month cashflow projections.  Banks always love these but for an OMB this is too long a time with way too much uncertainty.  Also an individual month could show huge swings.  In this case the client could easily have £1m of funds coming in and as much or more going out.  Looking at the cashflow we could see that in week 3 there was the corporation tax to pay and in week 5 the VAT.  By week 8 the bank were going to completely withdraw the £400k overdraft facility.

One of the major operating problems for the company was the amount of plant they had to have on site – often for up to two years or more.  The directors running this business had done their sums.  They knew that hiring such plant would cost more overall than buying it, without the advantage of owing it at the end.  Indeed they knew that hiring could easily turn some projects into loss making ones – especially if there were overruns.  However, once we started looking at the cashflow it was clear they could not pay their suppliers for the purchase of the plant required in the weeks ahead.

So we helped to come up with a plan to go forward.  HMRC were helpful and we could arrange time to pay the corporation tax and could spread the cost of the VAT over the next 3 months (we had to do the same with the next quarter too).  They could negotiate with some suppliers for an extension for existing debts with the guarantee that they would pay all future orders in 60 days.  And we could cancel some nice to have items such as new vehicles where the old ones were still in reasonable condition.  These were the easy bits.

Now the most important part of the plan was to cancel the purchase of all new plant and have a company policy that until further notice they would only hire items, even though they knew this would slash their profits dramatically.  The directors were incredibly brave in doing this and it was fantastic that they were able to change their mind-set when they needed too.  This worked because instead of having to find over £500k in the next 2 – 3 months they could spread the likely £750k cost over 2 years – which is only just over £30k per month.  Then going forward for the next 12 months the same logic applied.

I am not saying that such changes were easy nor that there were not some let’s say blunt exchanges.   However, their ability to understand and put the plan into action and to start managing their cashflow systematically allowed them to resolve their problems.  18 months later they were back to buying their plant but this time from a position of strength.

Today thanks to the directors ability to get to grips with their cashflow they are a thriving company. Twice the size they were in 2009/10 with three times the profits, zero debt and exceptionally strong cashflow – with a nice bank balance to boot.  As for the bank - they switched.  For some reason this came as a shock to the old bank who couldn’t understand why the company didn’t appreciate all the ‘help’ they had given them in the difficult times! And of course the directors now get to quip that I successfully helped them to make a lot less profit whenever we talk about business!

Hopefully your cashflow situation is not as dire as the one discussed.  But I still cannot urge you enough to get to grips with it in a systematic fashion.  In times of difficulty it really can be even more important than profit!

By the way should you wish to have a copy of the 13+2 cashflow template please email with Cashflow 13+2 in the subject line and we will email you a copy of the excel spread sheet we use.

Until next time … Don’t panic but do consider your cashflow!