When growing a business always remember that cash is king
Finance There are many ways for a growing business to use cash efficiently. The key is creating a negative cash cycle and there are many simple measures you can take to establish that.
When growing a business, it is of vital importance to have access to cash or, if that cash is lacking, to have the know how in getting it from banks or in grants. Aidan Fitzpatrick is the President of the Entrepreneurs Organization and founder and CEO of app data company Reincubate: “The old adage ‘revenue is vanity, profit is sanity and cash is king’ is relevant here,” he says. “There are a lot of ways to preserve and maximise cash in a business.
“It pays to think about the whole cash cycle, from taking an order to getting paid, and to work out how it can be shortened, because a long cash cycle is expensive. It is important to have a negative cash cycle if possible, which means taking cash from customers upfront, and using methods such as the lean principle or just in time manufacturing. Dell used this and moved from a 19-day cash cycle to a negative one, which meant that as it got bigger it had an increased amount of free cash.”
A negative cash cycle
With so many online businesses these days, a negative cash cycle is even more important in e-commerce. “It pays to use a drop ship or an affiliate model,” says Fitzpatrick. “For example, a business might not actually own the stock it sells, but will wait until it gets an order and then contact the supplier to deliver it which will give them, say, 30 cash rich days. Another good plan is to focus on high value customers. It is often true that 20 per cent of the customers provide 80 per cent of the revenue, so if you have customers that are valuable to you and pay early or on time you can build up the relationship by, for example, inviting them along to corporate events, giving them preferential treatment and so on. In the same way you can ‘fire’ bad customers by putting the prices up, a process known as ‘scaling up.’”
There are many other ways in which business owners can raise more cash, from invoicing more promptly to dividing a long project into separate stages requiring a series of payments as you move along. Many customers will be willing to pay upfront or be charged a down payment and a further tip for small companies is to pay suppliers with a credit card as that will also give them 30 days before the actual payment needs to be made.
Of course every business will have a situation when they are short of cash and need to make it up. “First look at the gov.uk website,” advises Fitzpatrick. “There are many grants available to small and medium sized companies. Then remember that when you go to a bank for a loan, they will not look at profits but at ROCE – the return on capital employed. To help convince a bank to give you a loan, be open with them, don’t spring any nasty surprises and think about whether you have an advocate inside the bank. That relationship should help too.”
It also helps to remember that, contrary to popular belief, bank managers are actually human and as susceptible to be buttered up as anyone else. “Work with the bank to make them feel like a partner,” says Fitzpatrick. “If you can, offer new clients and services and make them understand you have an exciting future. It can help to invite them to corporate events, too.”