Article
Written by Brit Williams
Posted on 16/06/2014

Cash is king; why turnover means nothing in modern business

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Controlling costs is the challenge that modern SMEs struggle with most, according to new survey results published by multinational enterprise software firm Sage Group. This important revelation brings to mind an old saying: “turnover is vanity, profit is sanity but cash is reality”.

In order to grow a business, cash flow must be carefully monitored. It’s useful to break down your daily costs – including office space, salaries, bills, average supplier invoices and any other regular outgoing costs – so you know exactly how much cash needs to come in every day. If you’re taking on a new employee or making a major investment in the near future, make sure to add any additional costs into your forecast.

Time’s up for turnover
Although turnover is still used in the media as a means of tracking a firm’s success, these figures can be deceptive. In the latest quarterly edition of SME by The Times, several business owners shared their cash flow concerns. John Styring, chief executive of Igloo Books, was one owner to explain his decision making. He keeps an eye on cash flow by managing his stock. He never keeps valuable books in storage if it means struggling to pay the bills. Instead, he’ll lower the price to attract buyers, release cash and avoid a build-up of debts.

The message to emerge from both the Sage survey and The Times special edition SME magazine is that SMEs need to be cash aware. Having a cash reserve for emergencies and taking the time to plan ahead of investments will help you steer clear of the uncertainty still plaguing many entrepreneurs. And if you’re relying on customer payments to meet your monthly costs, then focus on building empathetic relationships in which both parties respect each other’s financial priorities.

Cash flow connections
Many business owners have a dedicated relationship building strategy that encourages prompt payment and increases the understanding between them and their suppliers. Sell A Door Theatre Company artistic director David Hutchinson holds social evenings for precisely this reason. “When we do a show we invite them [suppliers] to the press night. In a sense, they are part of the business, so we look after them. That goes a long way. It means, for example, if a theatre pays us late or goes bust, which does happen, we can work it out with them.”

Develop a serious reputation
While entertaining clients is important for relationship building, it’s also crucial that clients take you seriously. “Make it difficult for people not to pay you,” Styring advises. That means chasing late payments and even recruiting a debt recovery company to step in on your behalf if you hit a stalemate.

Although small business owners may be reluctant to grow their teams until it’s absolutely necessary, it’s a good idea to hire a trusted accountant or credit controller as soon as you can afford one. They will have the skill and time to scour through invoices and costs, giving you more time to step up your business initiative elsewhere.