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Wednesday, May 17, 2017
One of my friends likes to have a drink most evenings. A glass of wine with dinner or a pint in the pub is just a nice way to unwind with family and friends. But every year, there’s one exception. He always commits himself to Dry January, and for that month, he won’t even enter a pub.
Why does he do it? Because he likes to prove to himself that he doesn’t actually need a drink. That he can quit, cold-turkey, if he wants to. It proves he’s not an alcoholic.
Business debt is just like alcohol. Great in the right circumstances, but you must be sure that you’re not relying on it to get by.
Unfortunately, too many businesses do rely on it.
These businesses may even have forgotten why they originally extended their overdraft or started using invoice financing.
Since (unlike loans) these have no repayment schedules, they have never thought about how they were going to meet their obligations.
On the contrary. They continue to use these facilities until they simply become a fact of business life….. A given, not an exception…. Something they don’t even think about as unusual any more.
They use these facilities freely, and often for unsuitable things, for example to purchase large pieces of machinery.
But this is not right. These type of continuing facilities are only designed for emergencies and are not a long-term solution to any problem. They should not be used to fund long-term investments such as assets.
Borrowing must never be seen as something inevitable, and it must never become a habit. How healthy are your finances really, if that is the case? And what happens if your overdraft gets reduced or even removed?
If you have no firm plan in place for how you’re going to pay off new debt, you shouldn’t be getting into it.
This is extremely important because if you’re taking on debt in order to cover a financial emergency or gaps in your cash flow, it’s likely that you’re not great at managing your money in the first place (even if you’ve been brilliant at building up your business!).
This makes it more likely that an overdraft will become a permanent feature in your business, leading you down that rabbit hole of debt.
If your business has a nasty debt habit that you need help kicking, please get in touch. We’ll make sure you go “dry”, putting in place measures to pay off your debt – and ensuring that your finances are managed so well, you’ll never have to fall back on borrowing again.
Monday, May 15, 2017
Question: What have fast cars, beautiful women and invoices got in common?
Answer: If they’re not handled correctly you won’t get very far!
You’d be amazed how many companies do a great job winning contracts and delivering products but let themselves down when it comes to the invoicing.
So, here’s our top 3 invoice essentials that will ensure you get paid first.
1. The devils in the detail
- The obvious ones like business name, trading name, address, company registration number, registered office address and contact telephone numbers. Top Tip: Your company letterhead is a great starting place for your invoice template.
- If you’re VAT registered, you must show your VAT registration number and the VAT rate being charged. Show the date and have a unique invoice number. It should show the Net total, VAT total and Grand Total.
- Have a clear description of what the expenditure was for and include references useful to your customer such as order numbers or part numbers. Make it easy for them to identify what you are charging them for.
- Show your payment terms – 30 days, immediately upon presentation, 60 days
2. Make it easy peasey lemon squeezey
- Make it REALLY easy to pay you. It’s amazing how many companies don’t put their bank details on their invoice. Include as many ways to pay you as possible, BACS is one of the quickest and easiest but make sure you show your correct bank account. Top Tip: If you change your bank it’s always good to send an announcement around to those companies that pay you regularly, they may not notice a subtle change to a regular invoice and may try to pay into an old account.
- Some companies show details of what you should do if you have queries and perhaps impose a time limit to deal with queries when the product is supplied.
- Make sure everyone knows your terms and conditions of sale.
- Take the time and trouble to find out exactly where your invoice should be sent to ensure they are properly processed and go into your customers payables system. Don’t just assume it’s the place the goods or services were supplied. Large corporates are notoriously bad at paying if you don’t follow the system.
Wednesday, May 10, 2017
“What are these three loans for?”
“Oh, we needed them to tide us over. Money just wasn’t coming in fast enough. No big deal.”
I was taking a first look at the accounts of a new client. Their balance sheet wasn’t in great shape, but at first glance there wasn’t anything too disastrous either. Then I noticed the three loans, which had been taken out roughly once a year for the past three years.
It was an immediate alarm bell – and should have been for the client, as well, alerting them that there was a serious problem with their finances. But it wasn’t.
As we looked closer at their books, we saw that even though they were bringing in a lot of new clients, they had severe cash flow issues. They just weren’t getting paid fast enough to cover their expenses.
Each time, when they thought they were going to run out of money, they used a loan as a stopgap measure, allowing them to continue functioning smoothly for another few months. Then the old cash flow issues reasserted themselves and they took out a new loan.
It was a vicious cycle which they had no intention of getting out of, because the loans created the illusion that all was well. In reality, not only were the underlying financial issues still there, but they were burdening themselves with piles of debt.
Recently I’ve been talking about one of the hidden dangers of fast growth, which is that it is very expensive. One way to overcome that is to shorten your cash cycle, as I explained last week.
But sometimes that’s just not enough. There may come a point where you need to finance your growth in other ways, by borrowing money. This could either come from a bank, or (the more modern way of doing things….) peer-to-peer lenders or some other type of loan.This is not inherently a bad thing. Every engine needs oil.
But there is a big difference between borrowing to grow faster, and borrowing to stop yourself going under.
If you are performing well and are profitable, and want to borrow to give your company the tools that set it up for future success – for example, paying for essential new equipment or larger premises that allow you to process more orders, or putting the right staff in place – that’s great.
The loan will actively build your business, and the money you’re generating can be used to pay off the debt.
But that can never happen if you're borrowing to try and cover a loss, or cope with financial problems such as cash flow. That’s a sticking plaster solution which can only get you into more trouble, as in the case I told you about earlier.
I do understand why companies take on debt for the wrong reasons.
When you are growing fast and things feel like they’re moving in the right direction, it’s so tempting to believe that you just need a little bit of cash to help out, and that everything will sort itself out in a few months’ time. Sometimes business owners are so confident in the future of their business that they are even willing to prop it up with a personal loan, which is easier to get.
It could be called an optimistic approach – but it’s misguided. In a few months’ time, chances are that all those recurrent, underlying financial challenges will still be there.The only real solution is to put in place proper financial planning and management.
That’s what we did for the client I mentioned before. With good cash flow management, they could stop using borrowed cash to plug gaps, and instead use it to improve their position, and even start paying off their debts.
I compared debt to oil before, but it’s like fire too. Used carelessly it becomes destructive and uncontrollable, but used wisely it can be an extremely useful tool.
If you need to borrow (for wise reasons!) we can help you find competitive funding. But equally, if you think you need a loan “just to tide you over”, we can help you with that too. Just get in touch and let’s talk about how we can get your finances in order – so you never need loans for the wrong reasons again.
Wednesday, May 03, 2017
Now, all those late and sleepless nights, all the time away from your family, all those meetings, and all the fights, mistakes and tears – they’re all starting to pay off.
Not only have you just hired the team of your dreams, you’ve just walked out of a meeting with a potential client who could push your business ahead even faster than before – perhaps adding 10% to your revenue single-handedly. That new sports car is looking more likely now…..
It’s a dream come true, right?
Not so fast.
Here’s a little secret which many business owners only recognise when it’s too late.
The moment when your business really takes off is a moment of grave danger. That is when your finances risk spiralling completely out of control – without you even noticing.
Growth is great. But financing growth, especially rapid growth, can bring its own problems.
Your expenses suddenly multiply: Think of all those new staff members you have to bring on, the additional raw materials you need to pay for, all the new equipment you must invest in, and the new office space you need. It adds up fast.
Your profits? They often they lag behind.
It can really be a case of “be careful what you wished for”, if the result is that you struggle financially – and even put your business in danger – because you’re just not bringing in money fast enough to cover your expenses.
So what to do?
There are, of course, many ways to finance growth – and most people’s first instinct is to make a bee line to their bank manager.
But I want to suggest one different, cheaper way.
It goes back to the idea I introduced in my last email, of knowing your cash cycle. As I explained last week, a cash cycle is the time it takes for money you spend today on things like raw materials, inventory or staff to come back into your business, when customers pay for your product or service (along with, hopefully, a healthy mark-up!).
To achieve financial stability while you’re growing, it’s vital that you shorten that cash cycle, keeping the gap between when you spend money and when get paid as small as possible, so there’s always cash on hand.
Perhaps the most obvious route is to incentivise your customers to pay you sooner, so that money comes into your account faster.
You can give a small discount if an invoice is paid in full within a short, defined period.
If you're carrying out a big project it may also be possible to get paid in stages rather than at final delivery, or to get an up-front deposit. That way you are not waiting for the full amount for long, easing your cash flow situation.
You will be surprised how many companies are happy to pay an upfront or staggered fee. (And by the way, if getting clients to pay you on time – let alone early – is a struggle, make sure you’ve downloaded our guide to getting them to pay you faster.)
At the other end of the cash cycle, you can try and keep money that’s in your account there a little longer. Talk to your suppliers about whether you can negotiate longer payment terms. You may have to give something in return – for example, perhaps be more flexible with your delivery times – so think creatively.
And then you can make use of invoice finance (or factoring). Factors take outstanding customer invoices off your hands – for a percentage fee – allowing you to access their value before the customer has paid them.
Of course, in the long-term a profitable business is more likely to generate enough money to fill its cash cycle. So if you have cash flow problems, the first thing is to make sure your business is profitable – it’s surprising how many businesses are happily growing without realising they’re actually losing money.
But when you shorten your cash cycle enough, your cash flow problems alleviate considerably. Your growth will be a source of pleasure and excitement – not a source of financial stress!
If you’re growing fast but having problems managing your cash, please get in touch. We’d love to help you.