Keeping the bank account topped up

Of all the bad things that can happen in a business, the most obvious is running out of cash. The following article looks at how to keep this problem at bay with a series of tips.

I remember the story of a chief executive taking over a fairly large company. On the first day, he called the finance director into his office, and asked how much cash the company had in the bank. The guy responded that he didn’t know but would be able to find out by the end of the week. The CEO fired him on the spot, deciding that this was gross negligence. That may be hard, but you can understand the point. There’s a saying in business that “cash is king”. That’s because running out of money usually results in business death.

Starting in the first place

A lot of people starting a business, and this probably especially applies to installers, don’t have a big bag of money. This is difficult as our economy is based on “capitalism”, implying that we need to have some capital! That is why it’s important to build up some reserves before you start your business, and if you can’t you may not have the right temperament to succeed.

It is also good if you have a spouse or partner with a decent job or you are living at home. Anything which takes the immediate pressure off cash flow makes it likely you won’t fail before you have barely started.


The most frustrating of the various cash problems comes from “over-trading”. This is where the very success of the business directly leads to its demise.

That may sound strange, but a simple case is where materials are bought with 30 day terms and staff are paid weekly, but the average job takes a month and is charged under 30 day terms. Suppose a company has £15k materials, and a staff bill of £10k a month then doubles sales. The result is that money tied up in labour and materials doubles to £50k. And this extra £25k has to be paid out before cash is received for the job. The result can be a business that runs out of money just as the accounts are showing booming and profitable sales.

“I just ran out of money”

If over-trading doesn’t catch you, there are many other pitfalls. Income and expenditure do not happen smoothly throughout the year. Holiday seasons at Christmas and in the summer can see a paucity of work, but everyone still needs to be paid. Alternatively, if you’re a sole trader your own holiday can see maximum expenditure combined with minimal income. Then there’s the annual tax bill, PAYE and the end of VAT quarter. Equipment or vans might need replacing. There’s a long list of reasons why you can hit a sudden cash flow crisis.

Not charging enough, or maintaining the necessary level of charging

One tradesman I know explained how he estimated the hours he was likely to work, allowing for holidays, gaps and other dead time, looked at his minimum outgoings and calculated the amount he would need to charge per hour to survive. This was the bottom line and he would never go below this rate. The approach means you can quickly tell if you are going to make it as a business and guards you against running things in a way that guarantees a cash flow crisis.

In fact, underestimating work and pricing too low is one of the biggest risks particularly when starting out. If you are not trading profitably, a cash flow crisis is inevitable.

Maximise cash in, minimise cash out

If you will be purchasing materials for a specific job, make sure that you take a deposit to cover the cost, or even get the customer to pay directly (which can have the benefit of keeping you under the VAT limit).

Take the advice of tradesman Guy Hands, Screwfix regional tradesman of the year: “On longer jobs, I ask clients to pay in instalments with payments at the end of each week. I also ask for payment for the materials at the start of the job once they are on-site“. That enables any problems that are going to arise to be spotted early.

Make sure that you get your invoices out on time, and when they are overdue, gently chase them immediately. Psychologically it makes it more likely the customer will pay and your cash flow benefits hugely. If you don’t, you will find that the customer becomes less and less likely to pay as the time passes and you’ll face the hassle of the Small Claims Court.

Get a business credit card if possible but watch the balance doesn’t keep going up.

Make sure that you only pay your bills when they become due. If possible, get credit. The most likely way to do this is with a builders’ merchant account which also provides trade discounts.

Receiving online bank transfers, cash and payment cards are better than cheques as they don’t bounce in the same way and the money gets into your account faster.

Put money aside

Obviously, VAT must be put aside but you also need money ready for your annual taxes. So lay money aside every month for quarterly VAT returns and annual tax bills.

Beware of dominant customers

When you owe a supplier £10,000 and are struggling to pay, you have a problem. If instead you owe £1 million, your creditor has a problem. When you deal with large customers, it’s reversed. They have a tendency to owe you a lot.

That’s why dealing with large companies that dominate your business is hard. If they end up owing you a lot of money, you have a big headache. If they go bust, so will you. Their business risk becomes your business risk, but you don’t control it.

It’s very tempting to take more and more business from one client, particularly if it’s easy to win and profitable. Once a customer is more than 10% of your business in a year some red lights should be flashing.

Getting more cash in place

The more cash you have in place, the less chance of running out. However, don’t try raising money when the business is in decline and no other actions are being taken to fix the problem. Better to just shut down.

The following are the main ways of raising cash:

•Keep your profits in the business by keeping your salary and dividends low. That’s the easiest way to grow your capital footprint, the least risky and leaves you in control of your destiny.

•Get a bank loan. This increases your business risk as someone else may become the master of your destiny. Avoid personal guarantees if at all possible but remember if you haven’t created a limited liability company your personal assets will be at risk anyway and you could be declared bankrupt.

•Use leasing or specific loans for all equipment purchases.

Planning cash flow

Prevention is better than cure. Every business should draw up a cash flow forecast. The first step for this is an accurate sales forecast, and in my opinion, this is where efforts should focus. A sales forecast should be regularly prepared, and probably updated quarterly in the light of current trading. Previous sales forecasts should be compared with actual sales so that the forecasting process can be improved over time.

The sales forecast should then drive the cash flow forecast, which should be re-done monthly and again history compared to see how the forecasting model can be tweaked. Both underperformance and over-performance on sales should be modelled; it’s amazing what will come out. You probably will need help. Matthew Stevenson of fast growing The Landscape Company has this simple advice: “It’s worth having a good accountant.”

The end of the line?

An unexpected cash flow crisis would probably be the death of your business as you will have no time to fix the problem. In these circumstances, none of us have anyone else to blame because there are plenty of things to do to head off the crisis before it hits. So think hard, tread carefully and all of the best with your business!

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