“What are the consequences of a lack of cash in your business” the speaker at a recent workshop asked us?
That seemed a fairly straightforward question that just about anyone in business could answer from first-hand experience.
However the answer “A business without cash flow lacks oxygen to grow and take up opportunities” threw an altogether different slant on the discussion.
Just as a runner needs to suck in large amounts of oxygen to keep powering on; so too a company needs a good amount of cash to continue to move forward strongly.
Rather than considering a lack of cash flow as something others, such as creditors or banks have done to you, consider what the lack of cash flow stops you from doing.
Rob Millner, Chairman of Washington H. Soul Pattinson, in a recent BRW interview about his company’s consistently strong profits said “We do not have any debt, which means we can move quickly to acquire targets of interest particularly at the bottom of the market where the price is most attractive”.
Millner describes clearly how cash flow provides oxygen to his company.
Soul Pattinson does not rely on banks.
With the tightened credit available to small business you can no longer rely on banks to be the sole source of finance for your next business or property acquisition.
Cash flow oxygen means that the bank only needs to supply a smaller portion of the funds.
A position they are much more comfortable with and generally quicker to approve.
What impressed me even more at the workshop was their approach to creating the cash oxygen.
It centred on shortening the cash conversion cycle.
The cash conversion cycle normally is the length of time it takes to be paid by your customers.
The shorter you can make that time the more money you will have in your bank.
What got my attention was their view that the cash conversion cycle did not start at the acquiring of stock or invoice stage, but right at the very beginning at the activity to gain the sale.
If the time taken to turn a lead into a sale is shortened then the cash cycle will be reduced.
For example, a solar panel business can use satellite imagery websites to view the house of a potential customer without having to physically attend the site and so save considerable time.
The next stage is reducing the production time.
Getting the order out quickly and efficiently means the sooner you can invoice and be paid.
Bottlenecks in the production process cost you cash flow.
Getting the order wrong reduces cash flow. Customers’ changing their minds costs you cash flow.
This process needs to be measured in days and systematically reduced.
In addition, basic procedures need to be maintained, such as getting deposits on larger orders and having a structured debtor management system in place.
Another basic is not treating the business bank account as your own and drawing only a fortnightly wage like everyone else.
For businesses strapped for cash the process of becoming one rich with cash flow oxygen is best taken one step at a time. Measure each part of the cash cycle and determine actions to reduce it.
Peter Ambrosiussen is the principal of Ambrosiussen Accountants & Advisors www.ambrosiussen.com.au
Published by Toowoomba Chronicle www.thechronicle.com.au on Saturday 5 March 2011.