Basic business principles - Profit shows direction, but cashflow can kill.

[Dave A]

Thank you for the offer on two fronts, ProValue:

For the spreadsheets offer
For reminding me of this idea

I've PM'd details for the info.

[Vincent]

Turnover is vanity, Profit is sanity and Cash is reality

[Dave A]

Turnover is vanity, Profit is sanity and Cash is reality

Nice one.

BTW - here is the spreadsheet from ProValue - a big thank you there.

A warning - it is about 1.2 MB - right click the link below and select save target as

Financial spreadsheet from ProValue

[Ryss]

The problem of financing a business in the up phase, always has this impact on cash flow, and only varies dependant on the nature of the business. I remember the first business I worked for, which was a Ship Chandler. They purchased locally on 30 days terms and got paid by overseas shipping lines at 90 or even 120 days.

However there are a number of factors which can be controlled, which just adds to the complexity of the cash flow model. (may be covered in download, whcih a did not download - need to save my band width)

Reduce your debtor terms. Offer discounts, tighter control, material on site on 30 days terms , labour at 60 day terms, and make sure your system are 100% so as not to provide any excuse for delaying payment.

Reduce your stock turn over or better planning of material deliveries. Better control over the timing of deliver and invoicing of materials and increase frequency of deliveries. i.e. target to invoice materials in the same month they were received. Failing which the difference between payment and receipt will not be 30 days, as shown in the discussion, but 60 days.

Request extended terms from creditors.

Having maintained a good payment record with suppliers, and good relationships with your bank manager and your customers, will help when it comes to advising them of where your business is going and asking for increased overdraft facilities or more favourable terms. If you do not ask you will not get. 30 day terms are not a problem to a major supplier if they know you are a good credit risk.

Consider taking Credit Insurance on your book. It is a good risk insurance, especially if the 80:20 rules applies. 80% of turn over is represented by 20% of the customers on the book or worse.

While on the subject, what if 80% of turnover comes from one customer, and they decide to change from you to another supplier after a 20 year track history. Do not put yourself in this situation. Find other customers even at lower margins. I would not be able to sleep at night if I was involved in a situation like this. Can you believe this really did happen and who suffers...the staff who are being retrenched.

Lesson: Never under estimate your competition and never assume customer loyalty, no matter how good your service or quality is. .... price is king.

But for business owners to have an appreciation for the impact of increased turnover on theirs business, Budgets and Business Plans are essential to create an understanding of the relationship between various events, so that when or even before the impact takes place, the effect is anticipated.

And lastly avoid the temptation to spend. Build reserves to finance future growth.

[duncan drennan]

And lastly avoid the temptation to spend. Build reserves to finance future growth.

Hear, hear! I'll second that one.

[Dave A]

Some really good advice there Ryss. The only one I'm hesitant about is the Credit Insurance. My experience is that insurance is offered for a profit. If you salt away the instalments (build up that reserve you mentioned), I'd expect this to prove more "cost effective."

And you get to keep the money if you keep on top of your debtors

[Ryss]

Yep .. that would be nice. But financing a debt for 60 days is one thing. Having the debt go bad, when it represents even 20% of the total book will just about kill any small business.

So it all depends on the risk. Small businesses are not risk experts, so yes it does cost, but it is a cost that could save your business.

I have heard of many small businesses going under because their major customer defaulted on the debt.

[Dave A]

I have heard of many small businesses going under because their major customer defaulted on the debt.

True, but the real problem there is they are that dependant on a single major customer.

I get real twitchy if a single customer gets past the 10% mark. Solve it by getting more customers.