Watching the cash

The most frustrating cash problem is "over-trading" where the very success of the business leads to its demise. For anyone not familiar with this problem, a simple case is where stock is bought with 30 day terms, on average is held for 30 days and then is sold on 30 day terms. If the company has £200k stock and doubles sales, then (keeping it simple), the stock needed doubles to £400k. But this money has to be paid out before cash is received for the sales.The result can be that a company runs out of money, even though the accounts show booming and profitable sales.

One approach to this problem is to factor invoices. This means selling them to a third party which provides the money immediately for a small fee.

An alternative approach is to insure against debtors going bust. This comes with a strict regime where the insurance company dictates which companies are covered. It can change rapidly if the economic situation changes. You have to take the credit risk yourself if you want to continue trading with businesses who get black-balled.

Another approach for growing businesses looking for cash is to take out a bank loan. However, with loans come increased risk. As long as this is clearly understood, it's worth considering, but probably behind other approaches. Another snag is that if you are a small company, banks may wish to have your house as collateral. That means if your business goes down, you are homeless too. I personally have always avoided putting my house on the line.

However, prevention is better than cure. Every business should draw up a cash flow forecast. The first step for this is an accurate sales forecast, and in my opinion this is where efforts should focus. A sales forecast should be regularly prepared, and probably updated quarterly in the light of current trading. Previous sales forecasts should be compared with actual sales so that the forecasting process can be improved. The sales forecast should then drive the cashflow forecast, which should be re-done monthly and again history compared to see how the forecasting model can be tweaked. Both under-performance and over-performance on sales should be modelled; it's amazing what will come out.

Running out of money is bad. It is likely to be fatal when it is unexpected, with no time left for corrective measures. If that happens to us, we probably have no-one to blame but ourselves.

By Chris Barling, CEO, Sellerdeck. Originally published on

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