AB: All-Round Nice Guy

At the beginning of this year, reports began to circulate in the media that the economy would be ‘off the boil’, or ‘heading for a rocky patch’. Whichever euphemism you choose, the story was clear: originating from the joys of the sub-prime mortgage markets, and arriving firmly on the doorsteps of our business, the economic outlook would be looking decidedly shaky for a season.

Talk of interest rate rises, combined with a general sense of unease about how long the downturn might last, meant that a lot of consumers decided to ‘keep their money in their pockets’ - and *that*, in turn has led to the a general blowout in payments amongst businesses, resulting in a fairly widespread cashflow crunch across the country.

So what really is cashflow? Why is it so important? And how the heck is my business going to survive this trend? Important questions - and if you don’t already know the answers, then it’s vital for your business that you read on…

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Cashflow: a quick primer

Cashflow is amount of real world money you can use to live, do things, and expand your business. Sure, it’s the profit you make, but more importantly, it’s not the profit you’re *going to* make next month when that big sale comes through, rather, it’s the amount of available money you have coming in the door that sustains your business *until* that big sale comes through next month. 

According to Robert Kiyosaki, author of the immensely popular “Rich Dad, Poor Dad” empire, cashflow is the only true indicator of your wealth: it’s not the person with the most wealth when they retire who wins, but the person with the most cashflow who wins. That’s because there’s little point in having millions invested where you can’t touch it, but in the meantime, not having money to go buy groceries  :)

In short: your business needs income, and it has expenses. The difference between those two is profit (or loss), but having that profit *accessible when needed* is just as important as making a profit in the first place.

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Obvious signs you’re in a Cashflow Crunch

- Your suppliers tighten up their trading terms - they ask for their money sooner
- You have a higher percentage of bad debts that usual
- Your customers knowingly or unknowingly pay after the set due date
- Most obviously, your financial ‘reserves’ are dangerously low

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How to combat/survive/turn around a Cashflow Crunch

1) Ask for payment sooner: either upfront payments, or shorter credit terms.

Moving customers/clients from long payment terms to short ones is really difficult - by all means, begin any changes with new clients, and transition long standing clients as required. More radically, look for a carrot to dangle in exchange for upfront payment - a genuine offer of something extra, or for priority service to ‘preferred customers’. Take care implementing anything quickly - this is your customer base!

2) Negotiate better terms with your suppliers. 

Not necessarily just ‘longer’ terms (remember, it’s all swings and roundabouts), but *smarter* terms: communicate with the 20% of your suppliers who are the 80% of your costs, and find out what payment terms best suit you both: monthly accounts? seasonal? half up front, but the rest on 60 days?? Grab a coffee together and find out.

3) Smooth out your payments both inbound and outbound. 

Case in point, I have a system whereby my clients can pay only $1000 a month until their account is cleared - sure, it’s little more admin, but both sides benefit. On the flip side, though, I don’t offer discounts with this payment option - a fair compromise.

4) Apply graded discounts for early payments.

I like the ad for a certain pensioners’ insurance agency, where they say they don’t charge extra to pay by the month. You can take that in two ways: either they’re more expensive monthly, or they don’t give a discount for an upfront payment. More typically, you discount for early or upfront payments, since it directly assists your cashflow - if you do the financial maths (that’s another article, I promise!) you’ll be able to prove that a bird in the hand really is worth more than two in the bush. Ne’er a wiser word spoken.

5) Raise your prices. 

“You can’t do that!”. Well, actually - yes, you can. It’s not just ‘raising prices’ to simply get more money in the front door - often, a cashflow crunch is a sign that the difference between what you sell for, and what you pay out has been slowly falling behind the ‘rest of the world’. I know I haven’t radically changed my hourly rate for the past 8 years or so - long term clients have benefitted from my static rates in recent years. I’m not advocating doubling your prices, simply that it might be time to do some navel-gazing, and index for inflation - currently sitting at 4% per year. At that rate, something that was worth $100 eight years ago would now be worth $131. Astounding, isn’t it?

6) Tighten expenditure.

Don’t go overboard, but see what expenses can be held off for a few more months. I hate to promote this as a solution to cashflow, since it’s the *very act* of not spending as you usually would that creates the climate of uncertainty, and therefore, the cause of the crunch itself (thank you Jack Ryan/Tom Clancy for that insight). Tighten up the ship, but don’t go into hibernation - you have to work smarter, not stop operating.

7) Review your banking/payment options.

Lastly, it’s important to make sure that you can be paid easily, and that you have direct access to payments once they’ve landed. Go grab another coffee, this time with your bank manager, and find the simplest way for your customers to pay you, so that you don’t have to wait: for B2B’s (business to business), this might mean highlighting direct debit options; for B2C (business to consumer) businesses, this might finding the right credit card/merchant service, so you can limit your fee percentage; and for B2M’s (business to many - a fancy/MBA way of describing Internet-based businesses), you should investigate the different merchant gateways and ‘buy now’ button payment services preferred by your target market.

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Now, all the above advice is also easily given/taken by your own suppliers and customers - so both your ‘upstream’ and your ‘downstream’ may also be putting the same measures in place. 

The challenge is to find the right mix of solutions for your business, whereby you don’t simply offload *your* problem onto the upstream or downstream links in your businesses’ supply chain. Once consumer confidence returns, and we once again go from bust to boom, you’ll find that it really is a small world - so take the long-term view for your business, and begin to plan NOW for greener pasture ahead. Moo!

AB out