Businesses fail from lack of cash not lack of profits. Profits can be manipulated whereas cash cannot be!
The recognition of this fact alone is a milestone for any business. When people often draw up a business plan they can quite easily see a start-up business generate a profit on a regular basis throughout the early years of training. However, cash can reveal the reality of the situation.
Particularly when it comes to companies first starting up, with no or limited trade history, suppliers will be hesitant about providing any sort of credit so they are more than likely to have limited or no credit. Customers on the other hand will be looking for the longest period of credit available and will often pay late.
This is not however just a problem for start-up businesses as growing businesses can face the same issues also. As companies grow, really pushing on, dealing with significantly bigger clients, they might often demand significant periods of credit and over and above this might question and query several things on invoices raised. Although suppliers will now have developed a relationship with you it is unlikely they will even extend the same period of credit to you that your larger customers might demand.
I hear you ask what can be done to manage such risks?
The first thing is understand your cash flow needs – what does your business need and when by?
Research your customers; even if it is just online, do confirm the likelihood of delays in payments.
Consider the impact of your decision on your cash flow. How will this impact on existing customers and potentially future customers? Don’t just think about the actual cost, think about the opportunity costs i.e. what are you giving up in order to get into bed with larger clients?
Ask for staged payments to ease the cash flow burden.
If the figures don’t stack up, WALK AWAY!
Cash is definitely king, keep an eye on it and don’t let it be the end of you and your business!