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Why Profitable Businesses Can Go Bust!
Why Profitable Businesses Can Go Bust!
By: Sue Hirst from CAD Partners Pty Ltd
If a business is selling plenty of products or services and buying labour and parts at the right price how is it possible for it to go bust?
Cash is more often than not the reason why so many businesses fail. Profits can’t be spent until they are collected. Obviously it’s important to sell at the right price and create the maximum amount of both gross profit and net profit. If you don’t focus on collection though you’re business won’t last very long. Cash is the lifeblood of any business, and if it isn’t flowing at the right place at the right time, this can cause real headaches for the business owner.
Getting cash into the right place at the right time, means having it in your bank account for more of the time, and not that of others. There are many places your cash can be other than in your bank account, such as
- Customers who haven’t paid you yet
- Suppliers you have paid too quickly
- Stock – surplus or slow moving
- Work in Progress – work not invoiced
- Plant and Equipment that could be leased
- Excessive overheads
Let’s briefly discuss some of the above and how you could get the cash moving back into your bank account quickly.
Customers who owe you money are more important than those who don’t! It’s much easier to get money out of customers you have already sold to than new ones. Many business owners feel uncomfortable about debt collection. If this is you, get someone else to do it. It may seem expensive but it’s much more expensive to have your cash funding other people’s businesses. To employ a part time Accounts Receivables clerk could cost as little as $200 per day. If done properly it could put much more than that in working capital back into your bank account.
Suppliers often get paid too quickly. You’ve heard the term ‘The squeaky wheel gets the attention”. Many bookkeepers will get a cheque signed immediately for a demanding supplier or worse still, as soon as the invoice comes in. This can play havoc with your cashflow. You need to use up all of the available terms and negotiate better ones if you can. It can pay huge dividends to spend a bit of time investigating other suppliers and better payment terms.
It may seem strange to consider stock as cash but it is. Just think of it as fifty dollar bills piled up in your stock room. Do you have any methodology behind your stock purchasing? Many businesses buy when the sales representative calls in or if they get offered a discount. You should buy stock when it suits you and your needs not those of your supplier. Discounts can also be a big trap. Ask yourself why are they discounting? Do they know something you don’t? Is there a new product coming up that will supercede the existing one? You need to measure the cost of having that stock sitting around sucking up your precious working capital against the discount being offered. It may be tempting to swap cashflow for potential increased profits but if it’s going to cause you cashflow problems perhaps it’s not worth it.
Work in Progress can be a real hiding place for cash. If you have hundreds of jobs on the go at once, it can be very hard to manage them all to a point where they can be invoiced. There can be all kinds of hold ups, such as slow parts delivery, labour problems, getting access to job sites etc. If you are trying to do this manually, or in your head without any process, it can cause you real headaches and cashflow problems. A simple job management system can save lots of headaches. With a computerized system you have all of the information in one place about each and every job. You will know what work you have done for whom, who worked on it and for how long. You will know what parts were used as well as being able to compare what you quoted on the job to what actually occurred. This puts you in a strong position to tighten up your quoting skills. One issue many contractors face is never quite knowing how much labour they are invoicing, compared to what they are paying for. With a good job management system you can see this very quickly and clearly. This puts you in a position to ask the question of labour hire “What were you doing with the rest of the time?”.
If you do a very quick estimate of how much money you have in outstanding customer debts, suppliers paid too quickly, excess or slow moving stock and work not invoiced, you may find it’s worth spending a little time and money getting these four areas sorted out. It could put tens of thousands of dollars back into your bank account, not just today but for the future. It could really reduce your headaches and sleepless nights worrying about cashflow. It could also reduce greatly your interest bill.
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Sue Hirst is the director of accountancy and financial controlling firm CAD Partners Pty Ltd. Browse their smallbusiness[hq] directory listing here.
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