My name is Ed Vernon. I’m non-executive on a number of businesses both large and small.
Cash, being the lifeblood of any business, and people can confuse profitability with cash flow.
If you think about it, I can invoice you, and it may be you haven’t actually paid me.
And if you don’t pay me I can have a profit on paper
but I don’t actually have the cash to meet my requirements
in terms of my suppliers and staff, and so on.
The best managed businesses will ultimately be excellent or
very, very good at managing cash.
To make that happen you have to have the right focus on it throughout the organisation.
Don’t be afraid to talk about it.
Make sure that the sales people, service delivery people, parts people,
everyone in the organisation knows the importance of cash to the business.
Ultimately, if we have no cash we can’t pay people.
And in that respect, that should focus the mind.
But also, then, that you back that up in terms of running your business
with the right processes and the right
incentivisations for people as well.
Again, I always find that people do what you pay them to do,
so if we pay people to actually get cash in,
as an incentive, it tends to be more effective than if we just ask them to.
Above all you need to make sure that you have honesty throughout the organisation.
That cash is, as I said, front of mind.
If you do that, then ultimately you’re going to be in a much
better position come more difficult times than your competitors,
and that’s what it’s all about.
The time to actually get your credit control act together is when you don’t have a problem.
And invariably that’s the best course,
and at that time you get your systems into place.
You make sure it’s front of mind for everyone.
From the sales and services people, to the parts people, the management, and so on,
so that everyone in the company knows how important cash is.
You then have to back that up and evidence it by the processes,
so that it’s on the agendas of all meetings, and that you have
a good cash flow forecasting system
usually run by the financial function within the business.
For larger customers, who you will be doing a lot of business with
and who will have separate accounts payable sections,
it does no harm to get to know the people there - go out
and meet them, especially when times are good, because then
you’ll have the relationship for the bad times.
If you have a business where you hold a lot of stock, and many businesses do,
a clever way to increase your cash position is to look at coming up
with innovative arrangements with your distributors, because
anyone who holds stock knows that it costs money and it depreciates.
A good way through that is to come to an arrangement with
your distributor; a supply chain management arrangement, as they call it,
where they hold stock for you.
You may have to go into an exclusivity arrangement with them,
or a quasi-exclusivity arrangement, but depending on your circumstances
it could be better to pay a little bit more money for your product.
It’s very clever, and it can free up an awful lot of money and increase customer service,
which is the holy grail: more money and better customer service.
If you’re in a really difficult situation and you need to get advice,
the last thing you want to be is either in denial -
‘we don’t have a problem’, or that it will go away - because it won’t.
Usually, it means getting a system in place, getting a process in place.
It means immediately centralising the function, and
making sure that it is on everyone’s agenda and making sure
that the forecasting of cash in is as accurate as possible.
The deal is never done until the cash is into your bank account.
When your terms are 30 days net, then on day 31 you put reminder letters out.
The concern of course, is that you’re going to annoy your customers.
It’s better to take the more demanding approach than to
sit back and hope that everything is going to be OK.