Beware the upturn!

I was lucky enough to get my first business to run as a division of a major PLC.  One of the first disciplines I had drilled into me was the absolute need for sound cashflow planning before any other consideration.  Each business unit had to produce a rolling 12-month cashflow projection each month to the group finance director and be grilled over the numbers and every assumption.  If you had a problem, say sales had fallen way short the previous month, it would have been easy to just assume they would be made up in the next month or months.  In this way you could avoid taking drastic action to reduce production, purchases or overheads.  However, ‘gaming’ the system could get you into a great deal of trouble if your quick-fix upturn failed to materialise; you were left facing an even more severe problem and a very upset group FD (who was also very unforgiving).

Know your cash position to the last £ – every day.  These lessons have stood me in good stead over the years and have made dealing with the banks so much easier.  When the bank manager knew you took your cash planning seriously a trip to their office to gain an increased overdraft or funding for an investment was so much easier.  If they knew that your history of cashflow planning was meticulous and fairly accurate (you’ll never be 100% accurate) you usually got what was needed. It has never ceased to amaze me how many business owners never bother to project their finances and then wonder why the bank isn’t supportive.

Remember, the old saying that ‘turnover is vanity, profit is sanity but cash is king’; it’s never ceased to be true (even if from time to time, dotcom investors thought differently).  ‘Never buy what you can borrow, never borrow what you can steal’; well the stealing concept is a bit over the top but this was the best advice I ever received when setting out to start my own business. Conserve your cash, even if it means driving around in an old car.  The good things can come later.

So why be concerned about the upturn in the economy?  Leaving aside the possibilities of a double dip and all of the recent additional burdens that business has to carry, pulling your business out of recession can be much harder than coping with the downturn.  When sales start to slow going into a recession we can do all the easy things, reduce stocks and overheads and slow production; the only thing that costs money is letting people go.  However, once sales start to improve again in an upturn you have to find the cash to fund the growth all over again.  Financing that big new order could be very difficult especially with the banks’ continued squeeze on lending.  You may be surprised to learn that more businesses fail in the upturn after a recession.  So, if you don’t already have a cash forecasting system, get started now and when you need to talk to the bank you will have had time to get used to the process.  Never done a cashflow forecast before?  Get your accountant involved; it could be the best money you ever spent.


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