Whatever you do, don’t follow this path.

Whatever you do, don’t follow this path.

This is based on a recent client story.

A familiar situation, cash is tight, even worse you’re making a loss. So the cash is getting even tighter. So you naturally push the sales button even harder and spend more time pursuing customers. Seems a sensible idea, so why not?

Maybe you’re looking to sell the goods or services that aren’t going to contribute that much to your profits? Fortunately we had provided split reporting Profit & Loss between the two sectors of the business – new work and maintenance. The former was far less profitable. The company tried to move towards maintenance but really had left this decision far too late.

The client was very slow at chasing debtors. This was sporadic and woefully inadequate. Consequently the debtors increased. It took this client six months to start to fix this critical issue. In the meantime credit facilities were tightened by their suppliers, some required payment up front, others reduced the credit limit. This greatly inhibited their ability to trade, they lost contracts and the situation spiralled towards being out of control. The directors used their personal credit card.

They had to make some key staff redundant, inhibiting their possible redevelopment. Insolvency arose and the client entered a Creditors Voluntary Arrangement with a very much reduced size of business, from £4 million down to £1½ million.

The obvious tips:

  • Always focus on debt chasing
  • Live by a regularly updated cash flow forecast
  • Obtain prompt, quality management accounts which you understand and can trust
  • Split these accounts between the key sectors of your businesses, projects, contracts etc.

Then the magic bit - take action to improve profitability and hence generate more cash

Simple really.

Sales is vanity, Profit is sanity and Cash is King – as always

This entry was posted in Accounting, Management Accounts and tagged in Accounting, Bookkeeping, Management Accounts by Caroline