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Unlocking success: the crucial role of cash flow planning – Albert Goodman

All businesses live and die by cash flow, says Chris Lewis, partner at chartered accountants Albert Goodman.

Every business across the South West, be it a start-up, a scale-up, an LLC or PLC, a charity or a co-operative, will have one thing in common – it will live and die by cash flow.

It is the single most important thing for a business looking to build a platform for sustainable growth and success.

Why is cash flow so important?

Fundamentally, healthy cash flow means a healthy business. An important distinction for owners and leaders to understand, is that there is a substantial difference between invoicing and getting paid.

Professionally, I have seen many business owners fail to grasp this in a way they should. The same goes for understanding cash, profit and the working capital cycle.

Put in the simplest terms, longer capital cycles can tie up capital long-term. What this means in real terms, is that you are not earning a return.

Shorter capital cycles, however, will make your business more agile and able to free up cash faster and, as far as start-ups are concerned, this is mission-critical.

As a founder, having a great idea is one thing. But you need to understand the financial and tax systems in place.

Knowing the systems

When it comes to taxation, models such as PAYE, corporation tax and VAT are generally well understood. But when it comes to, for instance, break-even points and the knowledge of how to run a debtor’s report – operationally critical systems and procedure – you would be surprised how there are gaps in the knowledge of business owners.

Getting this right matters to your people and to the bottom line. So, seek help if you need it.

For bigger companies, leaders likely have the people around them with the skills and experience to make this as smooth as possible but what if you are a smaller operation?

Having the right tool, for the right job

There is so much technology on the market which can help you navigate these processes.

Picking the right tool for the job is really important here. Accounting software has come a long way and businesses can now have instant access to off-the-shelf financial tools.

But before you invest, consider what your needs are for both the short and longer term. Where do you have the skills in-house, where do you need support and how much of this can be solved by investing in the right tech?

If you are on a growth journey, consider whether the same tools can scale with you.

Taking the gamble on growth

When it comes to scaling up a business, there are no hard and fast rules for recruitment, but it should always be done with cash flow in mind.

There is a choice: recruit for growth or grow, then recruit.

Growing too quickly, you can easily find yourself in choppy waters. You may invest in people only to find that the pipeline of work just is not there.

So, you need to ask yourself, if you are bringing in new talent, are your company payment structures sufficient that you can meet payroll month by month?

On the other hand, you may not have the pipeline, but you have come across a spectacularly talented individual, or group of individuals that you know in the long-term will bring massive value to your business.

The question here is: are you in a solvent enough position to bring that person on-board? If you do not want to see them move to a competitor, are you stable enough to take a tactical risk in bringing in new people on the grounds that it will pay off further down the line.

Growth in people always comes back to cashflow. Ask yourself, will new hires change your cash flow and is there enough to initially absolve these costs… and for how long?

Growing fast – why it is not always a good thing

It is all too easy to get caught up in the growth journey, and understandably so because it is an exciting time.

But there is such a thing as growing too quickly. So again, we come back to cash and payment cycles.

It is one thing to be plucky and take on loads of work, all for the purpose of growth. But if you are taking on that work, without the proper payment cycles in places, then it can be counterproductive.

Because what happens here is that outgoings very quickly begin to outstrip income. Costs spiral and there is not enough cash coming into the business to warrant your day-to-day function, let alone to fuel growth.

And again, this comes back to the basics of business owners understanding the distinction between invoicing and getting paid.

Cash flow will always be the lifeblood of any business and it will be vital to the many enterprises that are on the up across Bristol.

Chris Lewis offers a complete accounts and taxation service to personal and corporate clients who range from fledgling start-ups to larger owner-managed companies, and groups of companies

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