Cash Rules Part 1: Who Rules Your Cash?
Lyndsay Fox, the billionaire founder of Linfox and one of the richest men in Australia, once said that “Cash to a business is like the blood in our veins. Without it, you’re dead.”
It’s a message that struck with such precision that I’ve not forgotten it since, and it’s because of that message that I’m able to share my thoughts with you today.
Cash Flow is King
Over the past 25 years, I’ve been working with small business owners to work through the key issues holding them back from business success, and by far, one of the most pervasive problems is that of cash flow, or lack thereof.
What amazes me though, is that instead of asking me to help them solve the core issue, which is that their business isn’t making enough money, they ask me to help them fix the short-term problem by artificially inflating their cash flow with overdraft lines and bank loans.
While that sounds great, here’s the problem…
- Business financing is a lot like personal credit – You only get it when you don’t need it.
- When the money runs out, you’re back to square one. You haven’t fixed the core problem, you’ve just prolonged the symptoms.
Now some might argue that banks are the enemies here. They believe that banks should give money to the people that need it most, rather than those that don’t.
Yes, this is frustrating, but what if instead of thinking of yourself as a victim, you saw the lack of financing as an opportunity to create a new set of rules for your business that will not only solve the short-term problem, but the profitability issue at the same time?
Creating Your Cash Rules
The reason banks don’t give money to those in need is because it’s risky. They are afraid they won’t get it back, and for good reason.
However, if you take the time to create your own set of cash rules, you’ll find that you’ve not only mitigated the risk, making your business more attractive to banks, but you’ll also take control of your cash flow. It’s not a missed opportunity, it’s a golden opportunity!
There are No Industry Standards
It never fails. I meet with a business to help them create a set of cash rules, and they tell me that they can’t do it this way because “that’s not how the industry works.”
My answer to that is simple – it’s your business, you make the rules.
The only industry standards you need to adopt are those which make sense for the health of your business. Anything else is secondary and subject to change.
The Trick to Offering Lines of Credit
The first new cash rule that your business should adopt is that of how to give credit.
I’m astounded by the number of business owners that give credit and terms to anyone that walks in the door. This is your business, remember? The problem with giving credit is that it kills cash flow, and if you look back to Lyndsay’s advice you’ll see that this can not only hamper your business, but kill it.
Instead of blindly giving credit to anyone that asks, I believe that there’s only one instance in which it makes sense, which is when it results in more sales.
Here’s how I make that decision in my own business:
- Create a credit application which collects everything you need to know in order to make a sound decision. This includes business details, personal details, credit references, and a personal guarantee. When in doubt, spend some time with a good solicitor to make sure that your credit application form is sound.
- Create a specific set of rules for deciding who receives credit. Is there a minimum order amount? Is there a trial period? Get this in writing and communicate it with your team.
- Draft a full Terms and Conditions document which specifies your rules, and distribute this to any customer that seeks or obtains credit on behalf of your company.
- Set a hard deadline on invoices, and be firm about it, g. must be paid in 14 days.
- Set individual credit limits for each client in order to mitigate risk and avoid being overexposed because of a single client.
- Create a policy which details revocation of credit, in the event that a company violates your terms.
- Enter invoices, receipts, and payments daily. Keeping your books up to date prevents mistakes and will ensure that you always have the most up to date numbers so that you can best manage cash flow.
- Don’t do it if you can’t. If you’re too busy, hire a professional to manage your books for you. It not only assures you get it done right, but that you aren’t bogged down by the little things that keep you away from your vision.
- Be persistent, but never demanding. If a client is late, then remind them that they’re late and ask for a payment. That being said, never push to the point where a client goes into defense mode and stops responding to your requests. Litigation is costly, both in time and in money, so it’s better to be polite, but firm, rather than demanding or pushy. Treat business owners with respect, and they’ll treat you with the same.
- Be prepared to collect debt with an official collections procedure in place so that you aren’t surprised when things go south. It’s best to have this in writing, and if it means you must revoke credit after a late payment, then so be it. It’s your business, you make the rules.
Don’t forget “Cash to a business is like the blood in our veins. Without it, you’re dead.” So be sure to set and stick by your business’ cash rules!
I’ve spent 25 years helping businesses with cash flow issues, and what we’ve touched on in this first part of this series is just a fraction of what SP Solutions can offer as a business advisory. In person, we could go over your business in very fine detail.
SP Solutions would be pleased to take you through a free business consultation to understand your current challenges and advise a plan ahead of how we can assist you to achieve future financial success. Click here to get your free business consultation.