There’s an oft repeated statement that “turnover is vanity, profit is sanity, but cash is reality”. It’s one that I frequently use but what does it really mean?
Getting sales is generally easy if that’s all you focus on - simply reduce your price to lower than any of your competitors, and customers should be willing to buy your product or service, especially if you also offer trade credit. Having an increasing level of revenue is good for the ego and it’s the most common question asked of, and quoted by, business owners with words such as: “I run a £400k business selling X or Y”.
If you’re making a profit then you can generally sleep easier at night. Whenever you sell your product or service, if you generate more income than you spent in creating and supporting it, you can rest easy that your business is heading in the right direction.
But however strong your sales volume is, and however profitable it might be, you need to have the cashflow to be able to meet expenses as they arise. If you can’t, you’re in trouble, and that’s the reality.
That’s why it’s so important to have a cashflow forecast which includes all your income and expenses, and lets you see if you’re likely to run out of cash at any future point. Timing is all important and, if you can see a cashflow gap in advance, you can take steps to ensure you have funding available to meet the shortfall. It’s far easier to seek funding well in advance of when you need it than it is to seek it in panic mode. There’s nothing worse than going to a bank or finance house looking for funds and having to say you need them immediately. You’re seen as a much higher risk at that point, and decisions take time.
With the recent increases in interest rates plus the Bank of England likely to make more, finance is going to be more expensive. The number of registered company insolvencies reported by the government was 38% higher in October 2022 than in the same month in the previous year and 32% higher than in pre-pandemic years. Add that to the ONS statistics that 1 in 10 UK businesses reported a moderate to severe risk of insolvency in the next year, it’s not surprising that the appetite for risk by banks and other lenders is going to diminish. Getting funding is going to be harder and, if or when you get it, the cost will be higher so there’s every rather than delay.
Offering trade credit to your customers enables you to sell more but, if you give them longer to pay than your suppliers give you, there’s a likelihood that there will be gaps in your cashflow. These gaps will be longer and bigger if you get paid late so, to maintain healthy cashflow, it’s vital you get your customers to pay you, and to pay you on time. When offering trade credit to a new customer you may be unsure of the risk that they pose and how likely they are to pay you on time. That’s why Nimbla created their free tool that gives you a risk rating for your customer based on their credit history. You can sign up for that tool here. Their range of products give you some payment protection against your invoices not being paid is expanding this year with a new whole turnover product launching in a few months.
However, worse than offering trade credit and being paid late is not being paid at all and, when that happens, the impact on your cashflow (and your turnover and profit) is permanent. If you don’t get paid, and the value of the goods or service you are supplying is £10,000 with a profit margin of 10%, you’ll have to sell another £100,000 to recover the loss.
Cashflow is so important that it’s wise to consider credit insurance to cover against the possibility that your invoices won’t be paid. Nimbla provides credit insurance for single or multiple invoices, get in touch with them to discuss what you need.
There’s a long history of businesses of all shapes and sizes going bust because they couldn’t meet vital commitments when they fell due. Focus on cashflow to keep your business healthy and remember that businesses fail when they run out of cash.
ABOUT THE AUTHOR
Philip King is passionate about credit management, the importance of cash flow, and supporting small businesses. In a career spanning over 40 years, he has held senior credit management roles in the high-tech and communication sectors, and in distribution and retail.
More recently, he held the role of interim Small Business Commissioner for the UK government between 2020-2021 and, prior to that, was Chief Executive of the Chartered Institute of Credit Management (CICM) for 14 years. These roles involved providing support and advice to small businesses on their trading relationship with customers, particularly in respect of payment issues, and working with businesses of all sizes to improve their payment performance
Philip was also the architect of the Prompt Payment Code, and the author of a series of Managing Cashflow Guides, for the Department for Business, Energy and Industrial Strategy (BEIS).