Cashflow mistakes organisations make

Building a business requires cash and there are a few common mistakes that I see business owners make right before they run out of money.

Firstly, they focus on revenue rather than profit and cash - the old saying “revenue is vanity, profit is sanity” is so true. Businesses never go bust due to a lack of revenue; they go bust due to a lack of cash.

It is so important to understand the cost of delivering revenue and the cash required. All businesses need to understand their cost base and how efficient it is in generating revenue, and they need to think about how long it will take for customers to pay their bills and what payment terms suppliers require.

Secondly, a cashflow forecast (for at least the next 13 weeks) is vital for many businesses to survive. A cashflow forecast gives a completely different view to the profit and loss account; a profit and loss account will never tell you when the VAT or PAYE bills will be paid, or when your customers are likely to pay.

Finally, growing too fast is a common reason for business failure and I have seen this happen many times. Growth requires cash to fund sales activity and delivery of services or products, filling the cash gap between paying suppliers and receiving payment from customers. If you are growing a business, you need a solid funding plan.

In my previous role I witnessed the sudden and dramatic demise of SME suppliers who grew too fast, collapsing with unpaid bills and staff wages running into hundreds of thousands of pounds. I saw the warning signs before anyone else – requests for early payments, delays in delivery, stressed finance staff. We were well protected through strong supplier contracts and solid payment terms, but many others weren’t.

How financially robust is your business? Do you scrabble to pay the wages every month or the VAT every quarter?