Spectus Window Systems
The Commercial Column

HUNGRY FOR CASH ?
   

It takes a credit crunch, a drop in market volume and some casualties to get cashflow
into the headlines. Companies had it easy in the past few years. Easy money, easy
markets and low risk led to high debt and laid back cash management.

But after two years of hard-to-pass-on cost rises, interest rate increases and
a weak market, we've had a cold snap in the financial weather. Even the banks
won't lend to each other. Money is running dry.

Many window companies have diversified because of saturation in the first-time
replacement casement market. Instead of focusing on making and selling windows
many fabricators are also buying-in and installing garage doors, flat roofing,
conservatory roofs, paving etc. They've diluted a high-margin, cash-rich business
for a mix of bought-in, lower-margin, cash-poor products. They're making less profit
for the same turnover.

Failures have been rising, and we face a tough 2008. "Death Valley", the period
from January to March, has already claimed several high profile casualties.

Even stable firms can be tipped into crisis by the failure of their customers.
Are you doing what you need to survive?

Cash is King

Cash is the life-blood of any business
and it's the most neglected aspect
of accounts in most companies.
Profits can be manufactured by
creative accounting, but creating
cash is impossible. Businesses,
even profitable ones, fail if they run
out of cash, because it pays the bills.
So insist that your accountants
include a cashflow forecast and
review it regularly with them.

. . cash is King !
 

Don't be fobbed off with just a balance sheet and P&L.

One of the simplest ways to improve cashflow is to increase sales, especially those
involving cash payment. But take care because generating sales uses cash too, so
it's a question of timing and balance. Increasing prices, particularly to slow payers,
is effective. Review the payment performance of customers and involve your sales
force. Seek deposits or multiple stage payment wherever you can, eg on
conservatories. Use the 80/20 rule to control stock and monies owing.
   

Bill immediately

Bill as soon as the work has been done or order fulfilled. Do you have a system
to ensure that all jobs get invoiced? Do any get forgotten and invoices accidentally
omitted? No one likes to think it happens but inadvertently doing work for free is
more common than you'd think.

Call within a week of invoicing to (politely) ensure the invoice has been approved
and is being smoothly processed. Some customers will wait until you chase payment
before saying an invoice can't be processed because it's in some way incomplete.

Get a satisfaction note from retail customers to ensure problems won't delay
payment, and tell them the balance owing should be ready for the fitters to collect
when installation is complete. Ensure statements are sent out promptly. Review your
procedure for sending out reminder letters - phonecalls are usually more effective.

Credit limits

Credit limits should be set and used. Not all of these will be relevant but consider:

  • Be more selective when granting credit
  • Reduce the amount/time of credit given to customers
  • Is the limit based on your assessment of your customer's ability to pay?
  • Do you have a consistent approach to limits for all customers?
  • For major customers use a credit rating agency
  • Trade and bank references have limited value but you can read between the lines
  • Generate regular reports on receivable ratios and aging debts
  • Establish and stick to sound credit practices - train staff

    More checks . .

The more checks you add to your list the healthier your cashflow:

  • Review normal credit terms with customers
  • Prepare and regularly review an aged debtors list
  • Review your policy on settlement discounts
  • Have you clearly communicated your terms to customers?
  • Consider direct debtor financing

Stay healthy

The line between sensible use of available credit and unhealthy dependency
on the goodwill of banks & suppliers is a fine one. Especially when they are keen to
reduce their risk. Nearly all business failures were credit junkies before they crashed.
So make sure your accounts and systems give you clear, accurate and timely cash
flow information. If your accountant argues or procrastinates replace him or her fast.
Then go out and generate cash.