Let’s say it’s mid-month. You’ve checked your business bank balance and a slight panic has set in. The balance is lower than expected. Perhaps you had to pay a tax bill last minute, and the additional expenses in connection with cleaning, sanitizing, disinfecting, staff isolating and the extra equipment are all taking their toll on your cash.
You might not meet all month-end expenses including perhaps some payroll payments.
What do you do?
Here are 9 steps to avoid panic and get your cash inflow.
- Confirm The Shortfall
The first step to avoid panic is to find out how much extra cash you will need in the bank account to cover payroll and other essential outgoings. Once you’ve ascertained that number, consider whether you have personal funds to loan to the business or whether you need to look at other short-term sources of finance. Perhaps a Covid Recovery Loan? And review if you’re up to date with the current government support grants.
At this stage, it’s all about having options but not necessarily using them. We simply want to remove the panic and get you to work through the steps below.
If you end up having to lend cash to your coaching business, please formalize this and charge the company interest. There is a tax benefit because part of this interest can be tax-free.
2. Get Hold Of Your Cashflow Statement
The next step is to find out where the money went. And you will get the answer from a little-used financial statement called Cashflow Statement (not the Cashflow Forecast). This is a very useful document, usually one page with about 7-8 line items. It reconciles your previous cash balance to your current cash position and tells you where the funds went. It may well be that you did not make enough profits that month and this document will tell you that. Or perhaps you are not collecting cash fast enough.
You simply work through the line items on this document (with the help of your accountant) and come up with ways to get cash into the business within 2-3 weeks.
3. Calculate Your Cash Conversion Cycle
Obtain your aged debtors and aged creditors list and ask your accountant to confirm the average number of days parents take to pay you.
Let’s say it’s 45 days.
Then confirm the average number of days you take to pay your suppliers.
Let’s say it’s 30 days. If you have cash tied up in stock, do confirm how long it’s been tied up for, say 10 days. Your Cash Conversation Cycle will be 45 days + 10 days – 30 days = 25 days.
So you are paying your suppliers 30 days but then you are receiving cash from your customers 15 days later.
On top of this, you have 10 days where cash is tied up in stock. What steps can you take to reduce this negative 15 days?
Make a note of this for the purpose of step 7 below.
4. Discuss, Delay, and Defer Payments
Pause most of your supplier invoice payments and pick up the phone, be honest and re-negotiate better payment terms. Let them know that you are committed to paying them but can they grant you extra days or weeks after the month’s end? F
or some suppliers, you may need to offer something back to maintain the goodwill in a relationship including a promise to pay them interest on the balance outstanding or 15 days early on their next invoice.
If you have any tax payments (VAT and PAYE in particular) coming up, then ring HMRC or sign up for their time-to-pay service online straight away to give you breathing space.
5. Review Your Aged Debtors And Pick Up The Phone
Now that you have the debtors list from step 3, get finance/admin to pick up the phone to parents who have not paid. According to research by a debt recovery company Echo Managed Services, 40% of debt gets paid after a telephone call reminder.
You will usually outsource the credit control to remove any emotional connection you may have with your parents. Your credit control department, accountants, or lawyers can draft a series of strong debt collection letters and add interest in accordance with your contract.
6. 30 – 60 day Cashflow Forecast
Put together a very basic short-term cash flow forecast for the next 30 to 60 days. Avoid spending a long time on a complicated spreadsheet that might be out of date by the time you’re done and which may consume resources that should be deployed on getting cash in. So simply start with the cash at the bank now, add any possible short-term finance (step 1 above) and add any cash inflows to the business from steps 2 to 5 above.
7. Cash Acceleration Action Plan
It’s very important to then document an action plan from the above and put a due date on them. We’ve had clients increase their operating cash flow within weeks of working through the above. A key part of their success is the focus on this Cash Acceleration Action Plan, which documents all the ideas, who is going to do what, by when and the likely impact on cash.