Cashflow Problems: Idiot Proof Your Business
March 25, 2008
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Cashflow problems are the major cause of business ruin. In fact, any time I’ve been served with a County Court Judgement or a Winding Up order, it’s been because I’ve had cashflow problems.
So What Are Cashflow Problems?
Cashflow problems are caused when you have less money coming into your business than you have going out. They can be caused if you don’t make enough sales to cover your costs. But, this isn’t always the case. More often that not, they’re caused by people paying you late. Or, they can also be caused by not planning your cashflow properly.
For example, You might make sales of £15,000 per month and have costs of £10,000 per month. Now imagine, you’re getting paid three months after you invoice this work. Maybe people are simply paying you late. Or perhaps the work takes a few weeks to complete. Even though your costs are much lower than your expenses, you’ll still wind up with problems, if you have no cash in the bank to begin with.
By the end of month 3, even though you’ve made £45,000, only £15,000 will have gone into your bank and £30,000 will have gone out. So, you’ll be £15,000 overdrawn. To avoid this, you’ll probably pay your suppliers late instead and that’s when you’ll start getting people threatening you with legal action and trying to bankrupt you.
So How Do You Prevent Cashflow Problems
I’ve not yet found a way to eradicate these problems completely, as you’ll always get a..holes who deliberately pay late, or don’t pay at all. Often these are big companies who can afford to pay, but it causes a trickle down effect, as it puts other businesses like yours in a position where they’re unable to pay their bills.
Threatening to kneecap the people who do this, with a baseball bat or similar item might prove effective, but it could also get you into a whole heap of trouble.
So, here’s some methods I’ve used personally and some that I’ve not used - to my detriment, to help prevent cashflow problems:
More Work That Pays Immediately
When I first stepped in to save my ex-husband’s business, it was obvious that he had two problems. He had too much cash going out and he wasn’t doing enough work to cover his expenses.
The solution to the first problem was fairly simple - I did a whole heap of marketing to make sure we got plenty of work in that paid immediately. Even though this work didn’t pay as well, it was important, as the bank account was empty. But I also did plenty of marketing for work that didn’t pay straight away, as it paid more per sale; because it was obvious that more work and the cutting of unneccessary expenses was all that was needed. Well, almost all that was needed, but more on that later.
Cut Unneccessary Expenses
Any unneccessary expenses which didn’t contribute to the growth of the business went. Or at least I did my best to get rid of most of them, but when you’re trying to help an idiot, it isn’t easy. Luckily, most of these expenses weren’t even related to the business, although they appeared to be initially. For example - it is quite possible to run up a £2500 phone bill ($5000) over ten days on some porn related Internet sites.
Hopefully, you won’t have those type of expenses to wipe out, but if you’re in a partnership with someone who runs up bills like that, you need to get out straight away. Saving those types does them no good, as they’ll just carry on doing the same old things.
Look for other expenses you have that you don’t really need. Do you pay for staff mobile phones? Get rid of them. Just give them an allowance each month if they have to use their own phones for work. Do you allow them to take company vehicles home and pay for their fuel. Cut that out too. Do you rent expensive equipment that’s useful, but not necessary? Get rid of it.
Draw An Invisible Line On Your Bank Account
Once you begin sorting out your cashflow problems, begin drawing an invisible line on your bank account. Basically, you increase it gradually each month and you don’t allow anyone to draw any cash from the business that will take you below that amount because you might need it in an emergency.
This will work well for most people. It was working well for me. Within a short while, I got our invisible line up to £10,000 ($20,000) and it stayed there for a while. It will work well for you too, if you are disciplined and don’t go into business with an idiot.
But unfortunately, after the first few months, the ass…e I was in partnership with decided he wanted every single penny of that cash. We were snowed under at work and we only had one cashcard. So, he simply emptied the account and told me the machine had swallowed the card because he’d keyed in the wrong number. Also, he hid the bank statement and told me it hadn’t arrived. When I asked the bank for a copy and saw what had happened, it was “bye bye idiot”.
But this system will work well if you don’t go into partnership with an idiot. Most people who go into business have the best interests of the business at heart and hopefully you will choose someone who won’t deliberately jeapordize your business.
This lack of cash could have crippled my business. I was no longer in a bad partnership, but I was entering an extremely busy time (Carlisle floods) with no cash in the bank and a lot of money owing to me. And I was now the sole owner of a business that was once again in financial trouble. It was obvious that a lot of the work I was doing was not going to pay straight away, so here’s what I did:
Negotiate Discounts for Early Payers
I asked two people who we were doing a reasonably large amount of work for to pay us within 30 days, if we gave them a large discount. This might not sound like a brilliant deal, but when many people are paying 90 days later it is and it worked. I was under pressure to pay other bills and this brought the cash into the bank to pay them. The bad news was that my ex-husband still had access to the account, but I’ll cover that problem in the “banks” part of this series.
Always Chase Up Your Debts: Aside from having no cash reserves, I had two major problems. Firstly, because I didn’t have any cash spare, I couldn’t afford to take on someone to chase up any debts I was able to chase and I simply didn’t have the time myself. It was a vicious circle and with hindsight, I should have made it a priority to chase up money owing to us.
Never get yourself into this situation. Know your legal rights and set up a good debt collection system from the beginning. Otherwise you’ll wind up as I did with large companies owing you massive amounts and other large companies threatening you with court and bankruptcy for relatively small amounts. It’s shit, but it can happen.
People who don’t want to pay at all can also cause problems, but there’s plenty of stuff you can do to make sure this doesn’t happen. Read my advice on “guarantees” to avoid this situation.
Never Allow A Third Party To Be In Control Of Your Debt Collection: Before my husband joined Rainbow International, I asked the MD if they planned to collect more debts centrally in the future. He assured me that they didn’t, which was important, as I’d read that it was important to avoid a franchisor who did this. I don’t know if he lied, or he just hadn’t accurately visualised the future, because after a while, almost all debts were collected centrally.
Unfortunately, they didn’t collect the debts effectively for a long time. So I wasn’t getting paid. And the worst thing was, we weren’t allowed to chase up those debts ourselves. If we tried, we were told we would receive no more insurance work.
Never put yourself in position where anyone has this amount of control over money owing to you.
A Note On Overdrafts: An overdraft might be right for some people to assist cashflow. But, if you are going to go down that route make sure you’re using the overdraft as a prevention rather than a cure and do bear in mind that you’ll have to pay it back at some point. In my personal situation, an overdraft wouldn’t have been good.
Rainbow International did encourage franchisees to take out an overdraft, but there was no way I was going to do so just so they could pay me several months later. When things got really tough, I stopped paying them until they began paying me. Strangely enough, they didn’t think this was fair, but then some people are just plain stupid.
Luckily, their parent company were a lot smarter and eventually they realised people couldn’t run businesses on fresh air. Allegedly, they eventually got rid of the MD and recruited a team to chase debts owing to franchisees.
Use Decent Software To Forecast Cashflow: Forecast your cashflow right from the start. In the beginning, I used to use a pen and paper for marketing plans and a spreadsheet for cashflow projections. Nowadays I use Cashflow Forecasting Software and you should too. It’s far easier and it will save you a heap of time.
As you can see, cashflow can cause you huge problems. Hopefully, you won’t go into partnership with an idiot, so you’ll never wind up in a situation like I did. And if you’ve been tempted to go into a partnership that may not have been right for you, hopefully this article will put you off.
And if you’re thinking i was stupid for going into that particular partnership to begin with, you might be right. It was stupid mistake that anyone could make. To make sure you avoid making it too, you might want to check out this article: Business - Sometimes You Should Give Up.
And Don’t Forget The Following Points:
Be careful who you go into a partnership with.
Use cashflow forecasting software.
Draw an invisible line in your bank account.
Make sure you’re always doing some work that will bring in immediate cash.
Use guarantees to avoid those who don’t like to pay.
Put a good debt collection system into place.
Consider discounting for early payers.
Don’t put yourself in a position where you are not able to chase your own debts.
I hope this part in the business problem series was useful to you. If you enjoyed it, click here to subscribe in an RSS reader, so you don’t miss the remained of the series.
And if you missed the earlier articles in the series you can check them out below.
There’s No Business Problem That Can’t Be Solved
Risk and Money In Business - The Rules
Business Partnership - Is It Financial Suicide?
Do you have any questions? Do you have a cashflow problem that’s worrying you? Or do you have more advice for people who are suffering cashflow problems? Please share in the comments section.
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10 Responses to “Cashflow Problems: Idiot Proof Your Business”
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Hi Catherine,
This is great advice. I like how you intertwine your personal experiences into your post.
In business (and in life) we often have expenses that can easily be cut. Too often we think, “it’s only $5.00 a day”, but when you do the math, that ends up being $1825.00 a year.
Another way we have cut expenses is to remember to return any unused job materials. An extra piece of pipe or a fitting, can easily yield a $50-$100 credit.
Proper scheduling of employees can save money too. If you know you can’t start a job until 10 am, don’t have the employees start at 8:00 am, only to have them stand around for two hours. And, don’t over staff.
Barbara Swafford’s last blog post..How Doing Laundry Inspires The NBOTW
Hi Barbara - thanks. I hoped it would help. I think many of these problems are things you just don’t expect - until it happens to you.
Sending back unused materials is so important isn’t it - and hired ones too. I hit the roof a few times because people had hired equipment then just dumped it in my unit instead of returning it when they were done and the bills mounted up.
Scheduling jobs properly is so important isn’t it? And overstaffing is so dangerous. In my last few months at Rainbow, we had more staff than we had when we were extremely busy and far less was being done. I know Ian Denny said he also hit problems because of overstaffing and they now get more work done with less staff.
Another important point, particularly in businesses that do lots of individual “one-off” jobs, is to look for contractual work with retainer fees. If you can get above a certain level, you can have a very useful contribution to your overheads.
I realise this isn’t always possible, but with some lateral thinking, you can usually find something. Particularly if you are in a trade such as joinery (carpentry?), building, electrical, plumbing it’s difficult to get retainer work. But could you offer fixed fee per month consultancy/advice for in-house specifiers of this kind of work? In other words s shoulder to lean on for advice.
You may find that that a good number of low retainer fees can come in very useful. While in our field of work we offer an IT support service to small businesses who need us to do everything, we have also gained some very useful contracts where we don’t deliver the physical work, but we are on hand for advice.
In-house experts in your chosen field can get very lonely, and value you being available - even if only to give a second opinion which confirms their views on a given topic.
If you can achieve retainer income, you are far more resilient to peaks and troughs of demand, and may even reach a point where a high enough percentage of your income means you barely have to get out of bed to know you’re going to break even each month.
We started out when we re-started our business with over 50% of our income being guaranteed. This percentage has steadily risen, and we may even reach what I would descirbe as Eutopia within the next year - fixed costs = retainer income.
It also gives your business more inherent value and makes it far easier to sell. If a prospective buyer can see a level of guaranteed income, it reduces their risk considerably and give you a potential exit route in the future from your business.
And every business should seek ways to replace themselves and look as ways of selling their business. If they don’t, then you could argue that it isn’t really a business, it is a job - albeit a good one with freedom from a boss!
Ian Denny’s last blog post..Sky TV: Bad Customer Service Or Theft?
Hi Ian - that is a good point - if you have customers on a fixed montlhly contract as you have you’re laughing. It’s definitely an enviable position to be in.
The only people I think who are left out of the equation of replacing themselves are the artists of this world - the freelance painters, writers etc can’t and probably don’t want to replace themselves. Why should they - if they’re doing what they love. And to anyone who says that this is a bad decision - I only have one thing to say - JK Rowling.
Of course, she isn’t the only example I could quote - but she is an extreme example if you like.
And I have to wonder if these freelancers would not be better outsourcing their marketing and other activities. But, particularly on the Internet, there’s a massive problem in doing so - especially for writers. Many have built up their traffic through social networking and blog commenting, among other things. Can these things really be outsourced? Would you trust some 20 something from India to do this for you?
There has to be a solution to their particular problem, but i’ve been thinking about it for days on end and so far, I’m struggling.
Catherine, thanks for addressing this issue. Cashflow problems has to be the #1 cause for small businesses going under.
There have been a few times late payments have really been a pain in the butt.
I’m w/ Ian on prepaid retainers. I offer a 20+% discount off my hourly rate for prepaid blocks of a minimum of 32 hours/month.
Client’s have an incentive to prepay the block and save. And it helps me calculate workload. The biggest advantage is not having to collect.
Sterling Okura | bizlift’s last blog post..Walking On Water Miracle Revealed. You Won’t Believe Your Eyes.
Hi Sterling, Another person who likes the pre-paid idea. I wonder if some freelancers could work on this basis - maybe offer an excellent discount for prepaid work? I’m guessing a lot of businesses could work this way if they used a little imagination.
Hi Cath
My dad has been self employed most of my life and cashflow problems have always been the cause of hard times. And stupid customers of course. My dad is an architectural draftsman and he does a lot of design work for the residential market, which he enjoys but can be problematic. You wouldn’t believe the number of people who think that if they change their mind about the house after they’ve commissioned the plans, they don’t have to pay him for his work! It always boggles my mind.
When I was freelancing copy writing I specialized in small-medium size businesses for two reasons. One was understanding customers who were passionate about their business, but understood I’m a part-time worker/full-time mum. The other reason was they were better payers. I did a job for a health insurance company once and they didn’t pay me for 3 months! How was that going to pay day care?
Great article with some really useful advice. I dugg it.
Kelly
Kelly Rigby@ SHE-POWER’s last blog post..Do We Need Religion If We Have Faith?
Hi Kelly - thank you. There’s supposed to be laws in the UK to protect us from these big companies, but most of them just flout them.
I’m not surprised to hear about your insurance company being bad payers. I used to do a lot of work for the insurance industry and 90 days plus for payment was pretty much the norm. It sucks.
Clients love fixed monthly fees - particularly small businesses. It’s better for their budget.
I love Sterling’s idea and it is something I’ve been thinking about. We offer a base service of unlimited reactive support for a fixed fee per month.
It can help both our cashflow and that of the client though if we extend that.
We prefer this because it’s better that clients report everything that goes wrong rather than worry about the bill. That way we solve problems as they happen and prevent things worsening. It becomes easier to predict support levels.
But new instructions like “install a PC, join it to the netowkr and set up the individual to work from home” are separately chargeable.
Sterling’s idea is great - I was thinking of doing something similar so clients can pay an additional monthly fee which discounts our chargeable hourly rate, but spreads the payment over a year. That way clients can ask us to do non-contract work against a bank of hours.
Then each year we can increase or lower the monthly fee depending on what they used in the previous year. Again it helps the client budget so they don’t have huge bills all at once.
The moral of the story is to get a win-win for the client. They get a budget/cashflow benefit and we would get the same - closer to that magical break-even and profit level each month.
Ian Denny’s last blog post..Sky TV: Bad Customer Service Or Theft?
Ian - I can imagine how things would get much worse in IT if a problem wasn’t reported immediately.
That sounds like a great idea you’ve got for non-contract work. People hate unexpected bills so I bet that would work really well.