What Con The Fruiterer Can Teach Your Business About Cash Flow

All accounting students learn about cash flow but unless you have lived it, breathed it and dreamt about it, you just don’t understand it.

Look at the small business owner who has just closed their doors and sadly explains  “we just ran out of cash”. Could the owners have seen this coming or were these the words their accountants used to explain their demise?

Can cash flow really be so difficult? No, not really – but the small business owner must understand it.

Cash flow is the lifeblood of an organisation and if you understand it, you can grow and develop your business. In times of difficulty you can still pull your way through and live to fight another day – all by managing your cash flow.

In its simplest form, cashflow may be best understood if you think about that old TV icon from 1980s and 1990s Australian comedy, Con the Fruiter.

If Con at the start of the year had $100,00 in his fruit shop’s bank account and at the end of the year having paid wages, the tax man and his suppliers he now has $120,00, well,  Con’s cash flow would be $20,000 for the year.  Easy.

That should probably be his profit too. Nothing too difficult about that, except  for the fact that Con is making daily profit and loss decisions which have a daily influence on his cash balance – i.e. profit will always equal cash for Con, so he is constantly adjusting his business to take account of cost prices and sell prices and consequently increasing or decreasing his cash.

Aside from the early rises for the fruit market, Con’s business is managed relatively easily  because at best he will have a only ever have a couple of days of inventory (fruit and veg) and will have no debtors (all his customers pay cash for his goods). Con’s suppliers might give him a few days credit but given the goods are perishable I doubt this would be more than a week.

So Con knows just about every day how much cash he has in his till, how much stock he has on his shelves and how much he owes his suppliers. The business is almost self regulating! If Con started with $100,000 in the bank, if one week his bank balance increases to $105,000 he probably has made that in true profit terms (after he paid his suppliers). If his account is less than $100,000 he might have bought too much stock that didn’t sell, or perished, or he had to discount the stock in order not to lose it entirely. As a consequence, Con changes his business thinking weekly or perhaps even daily.

So why is cash flow more difficult than this? Because most businesses are not cash on delivery – they have debtors. Suppliers give varying terms and our stock usually takes longer than a few days to sell.  Add 25 staff and cash flow becomes more complicated. However, the simple lessons remain true.

Top 7 tips for cash flow

So if we don’t have a business as self regulating as Con’s what should we do? First, I  suggest you be disciplined, and unemotionally and honestly review your business for the following:

  1. Check stock is all current
  2. Discount aged stock lines so they sell – better to have your hard-earned  cash in your pocket than gathering dust on a shelf
  3. Confirm gross margins on all product lines are correct and understand what sells at what margin. Satisfy yourself that you are happy with that margin!
  4. Compare your debtor terms with your supplier terms – look to have your customers pay you before you pay your suppliers
  5. No matter what don’t ignore the tax man– think of the ATO as another supplier who wants to get paid on time. If you run into trouble, have your accountant speak to the ATO on your behalf (or perhaps do it yourself – it will save you a dollar and remove the mystery of the tax man) and arrange a re-payment plan.
  6. Have a  real relationship with your bank manager – when was the last time you met, walked around your business or simply had a coffee with them? Don’t be afraid to let them know things are tight, but leave the banker in no doubt that you have a plan to correct it.
  7. Phone slow debtors and ask for your invoices to be paid (don’t settle for fob offs: “no signatories are in today” or “the invoice has not been signed off” – be forthright and ask when will the bill be paid into your bank account and ask for a remittance advice). Every business in today’s market is holding onto their cash, you will have to push for it and may even have to consider withdrawing your services.

Above all, don’t forget Cash (flow) is King!

Let us know what cash flow tips have worked in your business.

Steve Hogan was a former Client Director at Vantage Performance, a profit improvement and turnaround specialist. Vantage Performance is a member of the Turnaround Management Association Australia and winner of the 2008 and 2009 “Turnaround of the Year” awards.



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