Do You Have Monthly Cash Flow Statements and Regular Cash Forecasts?

Cash is ready money in the bank or in the business that can be used to pay suppliers, overheads, or employees.

I often hear from the owners of growing companies “I’m doing more business than ever before but I do not know where the cash goes!”

Business growth does not necessarily mean more readily available cash. Quite the opposite is often the case. As a business grows, it hires more people, buys more stock, incurs more expenses, sells more products or services.

The cycle of cash in a business often slows down (due to lack of adequate systems) and cash becomes tighter.

Cash flow refers to the movement of cash into and out of a business. Keeping a constant eye on cash flows is one of the most important tasks for any business owner. Cash is the life blood of any business (even not-for-profit and social enterprise).

Money makes the world go round!!

Cash Flow Statement – Its History!

Without cash your business will seize up. Employees will walk out, supplier stop shipping and raise court orders to recover outstanding invoices. Many business owners do not pay enough attention to their cash flow statements – many never even see one!

There are 4 reasons why your cash flow statement is important:

It tells you where the money went;
It allows you to focus on creating cash surpluses (for future spending)
It provides important KPI’s
It allows you to make more effective finance decisions

When a company is growing it uses more cash which needs to be generated or borrowed.

Having a pathological attitude towards cash means you know when and how much cash you will need for the next stage of growth without running out.

Shortage of cash is one of the biggest killers of businesses.

Understanding your cash flow statement will allow you to make better decisions about your business.

A Cash Flow Statement is NOT always included with the statutory accounts that the Accountant prepares at the end of the financial year. If it isn’t – ASK for it! It is an essential part of any management accounts and reports your accountant or finance team provides.

As your business grows, getting clarity on your numbers on a regular basis becomes critical to your decision making. Remember the Cash Flow Statement, like all the other Financial Statements, is backward looking but it’s still an essential part of managing your business.

The cash flow statement is:

Net Profit,
Adding back any non-cash items that were in the profit and loss such as depreciation;
Taking off any capital expenses that have been incurred such as any purchase of fixed assets and;
Recognizing the change in working capital.

In recognizing how many debtors have paid us and how many suppliers we have paid and any tax payments that have been made, our closing cash figure which will be shown in the balance sheet as the balance of cash, either as an asset with cash reserves or as a liability if there is an overdraft.

“Many small businesses would rather face an angry barbarian horde than tackle their cash flow statement”

Nicole Fende

The cash statement shows you what you’ve spent your cash on and where you’ve generated your cash from in the past. It can be broken down into a more detailed analysis so that you can clearly identify, for example profitable parts of the business especially if your business has a diverse offering.

Cash Flow Forecast – Knowing The Future

Cash Flow forecasting sounds, and sometimes looks, complicated but it should be very simple and relatively easy – it’s mostly about finding the model that works for your business, that makes sense to you.

The more complicated you make something the less likely you are to maintain it. Equally if you have someone producing reports for you, make sure you can read them – if you don’t understand them, then they are a waste of time!!

Each month or week (or daily if you need it) the cash flow forecast is reviewed and the timing of cash moved according to any changes in circumstances. Always start with the current cash position.

At first using any forecasting model might seem a bit fiddly, but with practice it becomes a useful tool to test the cash resilience of the business.

Using different scenarios, you can see what the cash impact is:

on a drop in sales; or
a sudden increase in costs
a large future purchase commitment
a bank loan repayment

There are endless examples.

“Happiness is a positive cash flow”

Fred Adler

If you are considering a large purchase or an expansion of your workforce, using the cash flow forecast will show how your cash reserves will last, and what sales you will need and when. This allows much more effective decision making.

The cash flow forecast is a living model and changes with every piece of new information added. Understanding what it is showing you and being able to update it and undertake “what if” scenarios is an essential tool in the armoury for knowing your numbers.

Good cash management is one the essential habits of successful business owners.

You must pay attention to:

When, where, and how your cash needs will occur by developing a cash flow projection;
The best sources for meeting additional cash needs; and
Keeping good relationships with bankers and other creditors.

The time spent making sure Cash Flow Forecasts are kept up to date and accurate will help develop the strategies to meet needs of the business as it grows.

Cash Case Study – Money Pit to Cash Cow in 18 Months

With 2 successful start-ups under my belt, I was looking for my next adventure in business but had no inspiration at all! Out of the blue I had a call about a business that needed help growing from £5m to £50m. They had a hot Sales Director, experience CTO (Chief Technology Officer) and a new CEO so the only missing part of the jigsaw was the Finance Director, a role that was perfect for my background and experience.

After a couple of short meetings we established the chemistry between the 4 of us worked and I was excited to get started.

Challenge

The only accounts available were the statutory accounts from 18 months previously, the last year end was 6 months passed and no accounts had been finalized (that became a fairly urgent job!)

The historic numbers were good but not amazing and there had been significant investment in Research and Development (R&D). The products were a mix of software and highly technical hardware, at the bleeding edge of technology. The customer base was in the Intelligence and Law Enforcement community.

On paper it looked good.

Within a few hours of starting I got stuck into forecasting the numbers so a plan for growth could put together. It was critical to understand the investment and cash required to get this show on the road! Before that started, I tried to establish that the current numbers were accurate and up to date. Here came the first shock – the accounts were a mess.

They weren’t up to date and there was a lot of missing data. There was no history of regular management accounts, no stock control, no basic financial controls or processes at all. In fact, where cash had been a bit tight, the previous accountant (who had been part time and worked remotely) had simply not recorded supplier invoices until there was cash to pay them.

A sizable debt had built up.

Additionally there were now 53 people on the payroll or working as contractors, with R&D taking up more than half the work force. There were 18 product development projects in progress. With so much new product in the pipeline, the sales team were keeping their customers appraised of the next shiny new thing – resulting in delays in customer orders. No one wanted to buy the existing product range because they knew the next version was planned to be released in less than 18 months. Sales were grinding to a halt.

Lack of cash flow was rapidly bringing the business to its knees.

The Sales Pipeline showed huge demand, with deals in the sales forecast estimated at over £100m. The growth plans were built on this precept. But detailed analysis of the pipeline showed that a sizable chunk was based on hearsay, customer conversations about desire for equipment and tenders that were being discussed or planned but not executed – not on hard facts or tenders issued. The order book was almost empty.

On the first presentation of the numbers to the CEO I outlined the immediate cash required as £2m, just to keep our head above water.

Additionally cutting the workforce by more than half became necessary, indeed critical to survival.

It was a shock to have the actual numbers laid bare but historically there had been no management accounts and no one in the organization had their finger in the pulse of the business. Being the last person to join, and having been in the company less than a day, I recommended that they get rid of me too.

Sensibly the CEO recognized that I was a valuable part of the solution and not part of the problem.

What happened next?

Solution

This was a large complex problem with a number of relatively simple solutions that all needed to work together to achieve a positive outcome – initially it was all about survival. It depended on team work and collaboration as well as taking drastic decisions and having faith in the ability of every party to commit to the future success of the company.

We needed everyone to BELIEVE and ACT as one.

It wasn’t going to be easy, and we needed something like a miracle to happen.

There were six key steps that we took that turned everything around.

The Sales and Technical team engaged with a couple of key long term development partners and customers to find out what the customers REALLY wanted more urgently than anything else. This guided which product development projects were progressed and which ones were stopped;
With feedback directly from the most valued customers, R&D projects were reviewed and reduced from 18 to 8 with each having a delivery plan and timetable that was published internally AND more importantly, externally to new and existing customers. This created accountability in the R&D engineering team for the first time:
The Sales team (which was only cut by 1 person as we decided that we were going to invest in selling our way out of the cash problem) developed a scheme where they sold the products available now.

An exchange program was developed so that when the new products came out, no one would be disadvantaged by buying existing products. This allowed cash generation from immediate sales whilst the customers got a great deal on future product developments – existing products built from stock went out the door and in 12-18 months the new product was delivered in exchange for the old machines, which could be modified and re-sold in new territories and markets;

A lifeboat attitude was applied to manpower planning – if we had a lifeboat with limited spaces, who did we put into it to save the company? All employees and contractors were assessed and graded. We got the team down to 18 critical people;
Overheads were reviewed with a zero cost base attitude, which means everything was looked at to see if, knowing there was no cash, we would still pay for it now.

Immediately there was a 25% reduction in costs. A meeting with the landlord resulted in giving up part of the building we occupied and reduced rents after a few months, with the compound effect of also reducing utilities and rates. A pathological attitude towards spending became a fundamental part of the business – if it wasn’t generating cash, keeping the company legal or reducing overall costs, then it was not allowed!

Finally in getting the previous year’s statutory accounts prepared, it became obvious that no one had ever claimed R&D tax credits! The existing statutory accountants hadn’t advised the company at all. This tax break for innovation became critical to the company survival – and for the size of company there was £1m cash benefit as well as ongoing tax relief.

Results

There are 5 areas of any business that need to be assessed:

Sales
Marketing
Operations
Finance
People

In this instance Sales defined products that generated immediate cash – which meant creating demand for the currently available technology. There was enough interest in the future developments being promised AND it appeared that there was budget available. The typical sales cycles had been historically fairly lengthy because the Intelligence and Law Enforcement community are publicly funded, with tendering and other red tape involved.

On forensic interrogation of the sales pipeline it became clear that a number of tenders had been won but a delay in delivery of products had been caused by the promise of the next release of existing product ranges – money was on the table and simply needed to be unlocked! Every prospect and existing customer was engaged and assessed for BANT:

Budget – was there budget available;
Authority – did the person we were engaging have the authority to approve the purchase;
Need – was there an immediate need for the product;
Timescale – was there time pressure that meant we could leverage early sales.

Those prospects that fit the BANT criteria were targeted first and there were some quick wins. Engaging with existing customer was a rich seam of immediate cash generated from the sales of products in stock.

Marketing in what is effectively a secret society is a little more challenging but engaging in a select number of exhibitions and trade shows was worth the investment both in cash and personnel time.

This added to the customer focus groups allowed the R&D minimum viable development roadmap to be timetabled – giving the customers and prospects what they needed rather than a number of vanity projects that were “great ideas” from a technical point of view but not valued or valuable to the customers.

Operations were cut to the minimum required to keep hardware being manufactured and shipped efficiently and effectively. Processes and checklists were developed to enable whoever was available to support production. It was everyone’s job to be engaged in all areas of the business.

Sales engineers would regularly take demonstration products to customers. When they returned to base (often at the weekend of late at night) it was habit to abandon the kit until the next visit.

At that point they would find they had missing components which damaged the effectiveness of the next demo.

This was immediately changed and every demo was supported by a check out and returns processes that was the responsibility of both the sales and operations team. Creating a team accountability was critical to the business survival – we became brother in arms!

Everyone, regardless of their role, got involved in shipping when it was required. I remember packing complex electronics into foam lined boxes along with an experienced engineer – my lack of technical knowledge meant I double checked everything and £1m orders went out right first time. Historically there had always been a missing cable or the wrong connector sent and when we reviewed these mistakes they cost £’000’s for the sake of small components valued at less than £50. Checklists and attention to detail reduced these costs immediately.

Finance was at the heart of everything – including the daily milk delivery! Every penny in the business was leveraged to create £1 of value. Complete focus on cash generation combined with maintaining margins drilled into the entire team. Management accounts were produced within 5 days of month end – often on the 1st day of the month – and shared with everyone so we were all working towards the same goals.

With a lot of work and an understanding inspector from HMRC the R&D tax credits were claimed for the previous 3 years and £1m in cash was claimed – cash that could not have been timelier in its receipt!

The team, now reduced to 18, developed a siege mentality. We all believed in the business and determined to make it work. To aid cash flow, all but one member of the team took a pension contribution holiday (delaying the company contribution for 6 months with the promise of extra contributions when cash was flowing positively). This allowed the retention of an additional member of staff.

Where previously the sales and operations teams had been very separate from the R&D teams, new alliances were established, and everyone largely pulled together.

And the Happy Ending?

Stripping back the company to basics allowed all the base work that was needed to make the company an attractive acquisition target to be completed. It is often the case that this work is only done when either a crisis happens, or a business decides to change ownership.

It’s much easier to do it at the beginning as part of the company growth strategy.

As a result of all the hard work, and with total focus on a few core products, the business was in a fit shape to be sold. Changes in the tax legislation made the timing perfect for the shareholders.

Just 18 months after joining, the company was sold to a multi-national defence contractor of a sizable 8-figure sum. The employees shared in the riches with an Employee Share Scheme which was set up immediately after the initial re-sizing of the company – a significant incentive to rebuild the company into a successful profitable and attractive acquisition target. Cash on hand was in excess of £2.5m.

Do you feel like you have no control or don’t understand your numbers? Discover how you can feel more in control of your business, make your business worth more AND make it easier and more fun to run. Click here to contact Christine by email alternatively you can book a call with the Business Mentor of the Year 2020, author and speaker. Who helps business founders get their businesses in better shape so they can enjoy a happier, richer future. She saves them THOUSANDS and increases the value of their businesses by MILLIONS.