Commercial Director Chapman Robinson & Moore Accountants
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Managing your cash flow: Avoid the pitfalls

21st Apr 2016
Commercial Director Chapman Robinson & Moore Accountants
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Much research indicates that there are common reasons for businesses failing. Mike Foster asked accountants and bookkeepers across the UK: “Which factors do you most often see impacting a business failure”.

The list of responses covered:

  • Lack of working capital or cash
  • Growing too fast and unable to fund or cash tied up in debtors
  • Lack of experience – skill or management
  • A skill or resource gap in the business
  • Too few customers – unable to recruit or over reliant
  • Prices too low
  • Bad debts or poor credit control
  • Poor control of overheads
  • Lack of competition awareness
  • Inability to raise finance to support the development of the business
  • Unable to recruit the right people to build a team to support the plan – lack of capital or the availability of such people
  • Poor communication with staff, customers or suppliers
  • Stress or other health issues of key people
  • Bad management and supervision of people and processes
  • And yes, bad luck

When we review the factors individually, then a common theme appears. As professional advisers we have many discussions around these factors, which often relate to cash and cash flow management.

From the responses I received and my own experience, it is perhaps rare that a single factor will cause the failure of a business, so I wanted to explore any linkage between these common pitfalls.

What many accountants and bookkeepers stated was that two ‘cycles’ often contribute to a number of these factors and the ultimate difficulties the business could face.

Resource the cash cycle

Firstly, there appears a lack of appreciation to resource the cash cycle. This is more evident in a young, inexperienced business. The length of time this cycle may take and the working capital required to cover the cash flow in the interim is often undermanaged and underestimated.

From making the investment or raw material purchase, having the resources to find the customers, investing in the labour to progress and finish the work, while then committing the resources to invoice and collect the debt are sometimes not fully considered.

Finally there is the hope that the work has proved profitable, so that upon receipt of the cash it is greater than the investment during the cycle.

One accountant commented about a particular client: “He had a great business idea, but spent more time chasing new business rather than completing the current work and getting paid”

A bookkeeper shared an example of one of his construction clients: “We identified that he was not invoicing on a regular basis and it was therefore a reason why it was taking nearly two months to get paid. Upon supporting his invoicing on a weekly basis, suddenly his cash flow improved”.

This is a great example that highlights that often it is the easiest of examples that can solve a problem for a customer. The business owner is often too close to the business, or embroiled in working in the business, to see such a solution.

Poor pricing cycle

The other cycle is something my colleague and I often refer to as the ‘poor pricing cycle’.

A poor pricing model can result in the prices being too low, which of course has the financial implications of returning less profit, creating less reserves and providing less security.

However, this also has other implications for the business. Pricing too low or incorrectly can lead to the owners working longer hours. This will impact on their motivation, energy and desire, even to a point that they can sometimes start to dislike their own business. This can create more stress or health issues and impact on work-life balance.

There is every chance that there will be a service implication as the business tries to save money, reduce overheads or cut corners to retain a margin.

It will impact the marketing of the business as there are less resources in terms of both time and money to implement the desired activities or even create a plan. As a result, the business may then recruit any client, and often the wrong clients. These clients make you unhappy and are perhaps price driven that then keeps your pricing at the same poor level.

You are then in a position that all your customers are engaged with the pricing model and may have great difficulty increasing prices at a later point. Any market research may also be clouded by the view of the existing customers’ perception of value.

None of us professionally or personally like to see a business in difficulty or failing, so does this present us with an opportunity to support our customers further from an advisory capacity rather than just servicing the compliance requirement?

Our roles in the profession are changing. The good thing is that we have more choice than ever in terms of tools and software to utilise and demonstrate our expertise and knowledge.

Support your clients, keep them more than just alive and retain or even increase your fee level.


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