I speak to many business owners whose cash flow is stretched to the limit. The cause is usually slow paying clients and they’re reluctant to take action against them. Their solution is to trade their way out their late payment problem, to focus on their marketing and winning new business.
But this strategy rarely works and in most cases it makes the situation worse.
Let me explain.
We’ve all heard the expression “cash flow is the lifeblood of a business” but have you ever stopped to think about what this really means?
All businesses need cash. Cash is needed to pay staff, suppliers and other overheads. Contrary to popular belief, you cannot spend profits because profits are just a line on your accounts, a promise of cash and you never know if that promise is going to be fulfilled.
This is why cash flow is the lifeblood of a business and why you must do all you can to protect it. A lack of cash can be the reason why a profitable business is forced to close, but equally, the ability to generate cash can be the reason why a loss making business is turned around.
When cash flow becomes tight, the automatic reaction of most business owners is to get out and sell more. They think that focusing on their marketing and winning new business is the best use of their time.
But it’s not.
Getting paid for the work you have already done is the best use of your time.
Related content: The 5 keys to unlocking more cash in your business.
If you’re not getting paid for the work you’ve already done, your marketing is like a heart attack waiting to happen – and this could be fatal for your business.
Think about it this way.
As you provide your services and submit your invoices, some will be paid on time and some (probably most) wont. The clients that pay on time are good healthy clients for your business but the slow payers are like the burger and chips in your diet.
If your diet consists mainly of burger and chips (i.e, most of your clients don’t pay on time), you know you can never be healthy.
Your business will have some cash flowing through its systems but the late payments are like the fatty deposits and plaque that blocks your arteries and stops the blood flowing.
To start with you might not notice the effect the unpaid invoices are having on your business but gradually your cash flow will get tighter and tighter. Just like the bad diet when you start gaining a little excess weight, you think it’s nothing to worry about. You think you could soon turn it around if you had to.
But do you?
Let’s face it, when you’re in business you’re pulled in a hundred and one different directions. You deal with the issues that you think are most urgent, so you don’t give your credit control systems the priority they deserve. You don’t see the damage that’s building up on the inside.
When you try to fix the cash flow problems you do so by working harder. You focus your efforts on your marketing and winning new business and to start with, this appears to work. You get busier and busier and you’re sure this will generate the extra cash you need.
You may even need to take on more staff to cope with the extra demand but this increases your overheads. If the new clients don’t pay on time, or you’re doing more and more work for the slow payers in the hope that they will pay, your cash flow will be stretched to the limit.
All of a sudden the heart attack strikes.
You don’t have enough cash to pay your suppliers or to meet payroll and you’re left wondering what happened.
This is why you can’t trade your way out of a late payment problem.
Focusing on your marketing is like eating more and more fast food. Yes, there may be a bit more salad with it, but you’re not addressing the real problem.
So what should you do?
You need a fitness regime for your business.
You need to put your business on a diet (stop taking on problem clients) and start clearing the blockages in your cash flow.
This starts with your credit control procedures. Make sure you’re invoicing your clients on time and then sending reminders when your invoices becomes overdue. Also, never under estimate the power of picking up the phone. Making more collection calls is one of the most effective ways of recovering your unpaid invoices.
If you need to, don’t be afraid to take legal action against your clients. For small claims (anything under £10,000) the procedure is very straight forward. You can represent yourself so there’s no need to spend a penny on legal fees and you get to keep every penny you recover.
So are you going to commit to getting your business fit?
If getting your business fit sounds painful, think again because it’s not. And if you really don’t think you have time to do this, there’s one huge advantage that getting your business fit has over getting yourself fit.
You can delegate it!
There’s no need for you to do anything. Just give someone in your office the specific task to make getting paid a priority and if they need any help or support, we’re here to give it.