Caller "Help. I think my business is losing money."
Me "Why do you think that?"
"My bank overdraft has been increasing for the last few months and for the last four to six weeks, I've struggled to stay within the overdraft limit. It's gone up by about £50,000 in the last six months and I don't know what to do. We've not had this problem before."
"Do you have monthly accounts prepared?"
"No I just have the accounts done annually."
"Do you have any management information you monitor regularly?"
"I look at my sales each week and month. They've been going down a bit. Not much much but definitely it's down on last year. That's another reason why I think my business is losing money."
"Sales going down isn't a good sign but do you know if your customers have been paying you as quickly as before?"
"OK. I won't sugar coat this at all. Your cash crisis is serious but before deciding what to do, you need to find out why you have such a big cash out flow from your business.
Cash can reduce over a period for a number of reasons and some are easier to cure than others.
- Your business may be making a trading loss thanks to your lower sales, any price reductions you may have made to increase sales and cost increases.
- Your customers may be taking longer to pay in general or you may have one customer who has become a real problem and not paid their invoices for months. You need to look at your debtors list every week to see who hasn't paid and decide what you are going to do about it.
- Your stock may have gone up. As your sales are down it is easy to buy at the old rate and allow stock to rise.
- You may be paying for your supplies faster but I think that's unlikely. When you are close to your overdraft limit, it is normal to stretch your payments to creditors and that can even disguise just how bad the real problem can be.
- You may have made some unusual payments which have forced down your cash flow. Have you bought some new equipment or a vehicle? Have you paid a big tax bill? Have you increased the money you take out of the business?"
"I don't know why my business is losing money."
"This is a common problem in small businesses but you have made life more difficult by not having a proper set of performance measures in place and which you look at regularly.
You need to understand whether this is a "lack of profit" issue or a pure "cash flow" issue.
If you had monthly accounts prepared and explained to you, the danger signs would have been seen earlier and when you recognised a problem, you would have taken steps to cure it.
The actions you need to take will vary depending on if this is a lack of profit problem or a careless cash flow management.
What you can do quickly is:
Summarise your cash receipts payments over the last year into major categories and see if you can spot trends or unusual items.
- Look at the money your customers owe. The computer report you want is usually called an "aged debt analysis" which shows how much money is outstanding from each month. If possible print off reports for each of the last few months - it's not always possible because the data is updated. See if the value of overdues have increased. Also look at who owes you money and find out what has been done to collect the money. If there are problems or disputes, resolve them. Otherwise press for payment. With big values, a call from you as the boss rather than your bookkeeper or credit controller can work wonders.
- Look at the money you owe your suppliers in a similar way to point 2 above. Many more problems may be hiding in your creditors but you should at least make sure you understand the true situation.
- Look at any stock you have. Does it look more than normal. Check what incoming orders there are and delay any items you don't need. Also consider returning stock back to suppliers. They won't be happy but unless you have custom made items, they would rather have the stock back than have a large debt outstanding which won't be paid. For other items, can you put a special offer together for customers to sell the stock? It is well worth considering although at this stage, don't sell stock you expect to sell in the next few months at cost or below but do get rid of stock that won't sell for years.
My natural reaction is for you to try to get the money out of your business rather than going to see your bank manager and asking for an extension to your overdraft. Following the credit crunch, it is difficult and expensive to get extra money from banks and you don't have a good story to tell.
Do these things and then come back to me if you think your problems are not in the cash control side but you are trading at a loss."If You Are In This Position Of Losing Money
If your business is losing money or could do soon, I would urge you to make sure that you understand the financial situation.
Depending on your situation and the size of your company, talk to your accountants, find a part time finance director or start a finance coaching program.
You need to have the right measures in place which look across profit and cash and you need to make sure that you have enough confidence in your financial understanding, that you can see the financial consequences of your decisions.
If you just use the bank balance as the guide to your financial health, it can change very quickly and catch you unaware of what is really happening. Then when you are close to using up all of your cash, monitor bank balances often understates the growing problem because the credit you take from suppliers is stretched. When that reaches breaking point, you have nowhere to go.
If your business is in serious trouble and you don't think you will survive over the next few weeks, you must seek specialist insolvency help urgently. There are nasty penalties if you continue trading beyond the point of no return.
The conversation is continued in "How Do I Stop My Business Losing Money"