When cash is king

Written by Gerry Mulvaney | 31 August 2011

There is an old adage in business – turnover is vanity, profit is sanity, but cash is reality, and this is never truer than at this time of year.

Most businesses survive on credit terms from their suppliers of no more than sixty days. Those crafty sorts who run up to their credit limit and then move onto another supplier for the next month may be able to squeeze up to ninety days, but it does not make much difference when it comes to paying your bills. You still need cash in the bank to complete the process and the end of the holiday period is not the time when it will be piling up.

Hopefully you will be running a cash business yourself, but July and August will be the time when most of your customers take their holidays, so not only will the orders be down, but they will also have their own cash flow to think of rather than yours, so don’t expect them to be prompt payers. If most of your business is on account however the problem is exacerbated, because just at the time you will be getting the pressure calls from your suppliers credit controllers, you will find your own customers financial directors strangely unavailable when you chase your cash.

I had a very good description of cash flow from an old financial director colleague when I was a young salesman. My colleagues and I were very focused on getting orders signed and objected strongly when he used to put our customers on stop because they had not paid their bills. I was all for letting them have another delivery, because the cheque was in the post, but he was adamant; no cash, no order.

Of course as I became more involved in running the business, I understood the analogy. He described cash flow as like the hot water system in a house. He told us that we all expected to see hot water flow out of the tap when we turned it on, a bit like our salaries arriving in our banks, but if we had not got water in the header tank, the boiler couldn’t heat it and there would be no water flowing. You had to top up the header tank regularly, a bit like collecting cash from your customers and banking it. If the water flow into the header tank was slow, then until the pressure built up again, you had to leave the taps turned off; otherwise you would drain it again, a bit like your bank account. If the hot water taps stayed on and the header tank ran dry, then the boiler would blow up – as the company would if it ran out of cash.

The most important thing you can do at this time of year is to collect your cash from your customers and hoard it. Don’t turn on your taps if there is no water in the system, and if the flow is slow; don’t turn the taps on full.

Gerry Mulvaney

gerry@graphicdisplayworld.com