Cashflow - The Oxygen of Your Business

Today I want to talk about oxygen.

I'm not talking about the oxygen we breathe, I'm talking about the oxygen that sits within a business. There's a great mentor of mine called Keith Cunningham who's written a book called The Road Less Stupid amongst other things, and it is incredibly accurate in terms of some of the watch-outs that a business owner, chief exec needs to be thinking about when they are steering the ship, so to speak.

When I'm talking about oxygen, I'm talking about cash, because that is the oxygen of a business, cashflow, making sure that you understand it fully, that you don't delegate it. It doesn't matter if you're not good at finances and all that sort of stuff, that's simply a set of excuses, because there is nothing more important, it is the lifeblood of an organisation of a business. If you haven't got a business that's generating cash, you haven't got a business, it is as simple as that. 

As much as we have gone through a pretty tumultuous time with global pandemics and all sorts of chaos, uncertainty and things that we didn't expect, I know as people are kind of preparing for 2021, they're thinking ‘actually, you know, we can see a pathway, there’s vaccines around.’ I'm also very aware that there are a number of people out there that are still struggling, that might've heard some of the things that they should be doing, but just didn't have the capacity, the bandwidth, the focus to execute those things in 2020, and they're going into 2021 with, the same sets of issues, the same sets of problems.

What I want to do today is, I want to talk about the most critical key performance drivers, let's call it the optics in your business, around this oxygen, around this cashflow, because if you're reading this today and you're thinking, ‘I still need to take action, I'm not exactly where I need to be’, then these 13 things are going to help you.

If you are one of the people who have had a good year, good last 12 months and things are working well, there are still going to be a few points here of things that you may consider doing that are going to give you a bit more of a runway, a bit more bandwidth if you'd like, to be able to execute with more precision and more intention when things really start to open up. Before I get into the 13, one of the industries that I think this would be very, very pertinent to right now is travel.

My wife has a business that's involved in travel. The last year in that business has been pretty challenging because people just haven't got on planes and they haven't done what they used to do, there have been so many constraints. But what's gonna happen? As soon as we start to feel that things are back under control, there is going to be a huge slingshot back into that industry, booking holidays is going to be challenging, everyone can't wait to get on a beach somewhere.

If you're in that industry, for example, now may be the time to cut back a little bit, get your resources lined up because when things do start to, as I said, slingshot back, you want to be in the right place at the right time to be able to capitalise on that opportunity. When you are in this situation, the first thing you need to understand fully is your current cash position, your balance across. I always recommend doing at least a monthly cashflow analysis, if not a weekly one. In all the businesses that I have, we do weekly cashflow and we're always very conscious of the decisions that we're making that will affect cash.

The second thing that you need to be thinking about is, do you have any accounts receivables that you can access quickly? Because you want to have different things that are as liquid as possible in your business that you can get hold of when you need to because they are the things that are going to be able to get you cash quickly. Let's say your bank is overdrawn or whatever, is there any way that you can actually go and get money as quickly as possible? Accounts receivable is one of the first places to look.

The third area to think about is projected cashflow, just simply from your operations. You want to be looking for usually over about a three to four-month period, because that projected cashflow may show you some peaks and some troughs. Again, that just gives you additional visibility about how you can start to do things and just get a little bit more granular in the thinking of what you may need to do.

The fourth area is what I call actual versus projected burn rates. This is effectively the total expenses that you have on a weekly or monthly basis. Burn rate is quite often defined as the pace, obviously, at which you use cash, we utilise cash. And you never want that burn rate to be too negative. Now, I know there are a lot of tech businesses out there that have negative burn rates because they're gearing up to when everything sort of comes together. But in a lot of small businesses, you always want to make sure that there's a certain threshold. The minimum that I accept in any of the smaller businesses that I have is at least a balance of ￡25,000 to ￡30,000 in the bank at any one time, we never want to go below that. Of course, if the business is bigger and the burn rates higher than you would want to have bigger reserves possible for that. You then want to look at your variable and your fixed expenses.

So, obviously, the definition is pretty clear, the variable is the stuff that you can change quickly, fixed is something that can be a little bit more difficult to change, so that's often staffing costs and things like that, although there are choices you can make around that. You want to look at payments, any loans, vendors, it could be rent, all those sorts of things, anything that can be extended or delayed. You want to look at sources of additional financing that's available. So obviously there's been things in the UK, like bounce back loans, there's been lots of different support in the last 12 months.

A lot of those schemes are still applicable now, so if you haven't gone out there and leveraged debt, then I advise you to have a look at that. If that fails, don't forget about friends and family. It's not the nicest thing to ask, but if you're in a position where that oxygen is drying up, it's still something you may want to entertain. You want to also look at any sort of stray or unused assets that could be liquidated. 

So again, that could be cars that you have, it could be real estate, it could be stock, it could be inventory that's not going to sell for a period of time. Quite often, you have to sometimes sell that inventory at a loss, so you may look at that and think it's a stupid decision, but again, if you haven't got any cash, sometimes you have to make these decisions just to get yourself into some sort of level playing field.

Now, when you start to look at this, the next one is kind of a little bit tougher because you want to look at what I call cutting to the bone, getting rid of excess baggage and that's when you do look at people, you look at other sorts of costs. Now, it doesn't necessarily mean that you have to make massive redundancies, sometimes you can use furlough schemes, you can do all those sorts of bits and pieces, you can cut back on other expenses. But you have to look at these things, at this point because the way I think of it, you've got to protect the business and sometimes that means making some tough decisions.

The last couple are really about a summary of what you're going to do over a three to six month period, that's going to bring it all together. And the last piece is the communication plan around how you get this across to your team because let’s be honest, your team knows exactly what's going on. You want to protect the culture as much as possible through these times, and it's about being thoughtful, your employees are not ignorant and you need to be the best leader you possibly can at this time to create that certainty and to make sure you're making the best decisions for the future survival of the business, for them, for you and for everyone else.

I hope that's useful today. I know a lot of you are going through this at this point in time, so I thought it was useful just to go through those bits and pieces. I think ‘21 is going to be a great year, but some of these decisions are critical and it's best to look at them now when it's not too late to do so.

Nick Bradley

Scale Up Your Business

www.suyb.global