The uncomfortable fact about small business failure is that most of the businesses that fail are profitable on paper at the point they run out of money. Profit is an accounting result over a period. Cash is whether you can pay the invoice that arrives on Friday. They are not the same, and confusing them is the single most expensive mistake a small firm makes.
The four numbers
You do not need a finance function to run a business well. You need four figures, updated regularly enough to be current.
- Cash in the bank today, and the same figure a week ago
- Money owed to you, split by how overdue it is
- Money you owe, with the dates it falls due
- Committed outgoings for the next quarter, including tax
Put them on one page. If that page is only updated monthly, it is a history lesson rather than a management tool. Weekly is enough for most small businesses.
The cash conversion cycle
The underlying question is how long money is tied up between paying for something and being paid for it. A retailer buying stock pays the supplier, holds the stock, sells it, and then waits for the card settlement or the invoice. Every one of those stages consumes cash.
Shortening any stage frees money without any increase in sales. Holding less stock, invoicing on the day rather than at month end, and taking deposits on large orders all do more for cash position than a marginal improvement in margin.
Growth consumes cash
This is the trap that catches good businesses. Growing means buying more stock or hiring more people before the additional revenue arrives. A firm growing quickly can be more profitable each month and closer to insolvency each month at the same time.
If you are planning growth, plan the cash to fund it in the same conversation. The question is not whether the expansion will be profitable but how many months of outflow come before the inflow, and whether you can survive them.
Chase debt without apology
Late payment is a form of borrowing from you, interest free, and most small firms are far too polite about it. Set terms clearly on the invoice, send the invoice immediately, and follow up the day it becomes overdue rather than a fortnight later.
A simple escalation works: a reminder on the due date, a phone call a week later, and a firm written notice after that. Most late payment is administrative rather than deliberate, and a call to the right person clears it.
Keep a buffer and know your break-even
Work out what the business costs to run in a month with no sales at all. That figure, multiplied by the number of months you want to be able to survive, is your buffer. Keeping it separate from the working account is what stops it being spent.
Also know your break-even point in units or transactions, not just in pounds. A shop owner who knows the day’s takings needed to cover the day’s costs can make sensible decisions on the shop floor, which is where most of them are actually made.