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Commercial Flooring News

Cashflow In Flooring

Advice from experts that every business in flooring MUST READ

EVERYONE agrees that sound cashflow is vital for business survival and growth. Some go further and say that cashflow outranks profit.
The simple message is: Turnover is vanity, profit is sanity, cashflow is reality!
Factors that affect your cashflow include:
A change in your turnover (even a slight one);
An increase in your prices;
A decrease in your prices;
A change in inventory levels;
Taking on a new salesperson or any new employee. Or indeed letting one go;
A change in your receivables or your payables (how quickly you get paid from your customers or pay your suppliers);
Reducing your overheads; and
Increasing your borrowings.
The warning is not to carry out any of the above changes and just assume or hope that they will be beneficial. Any of the above may be good for business, but also may not. Problems can include more work, increased overheads, cashflow problems, operational or production issues.
The advice is to model the changes before you carry them out to see what the impact will be on your business.
Cash is the lifeblood of every business and no business can survive for long without it. As Mr Micawber in Charles Dickens’ novel, David Copperfield, stated: ‘Annual income £20, annual expenditure 19 pounds, 19 shillings and sixpence, result happiness. Annual income £20, annual expenditure £20 and sixpence, result misery.’
This simple advice is as relevant today as it was in Dickens’ time and perhaps even more so in the current economic climate. Never before has it been so important to plan for and manage the cashflow of your business and to avoid running out of cash. Surprisingly many businesses, big and small, do not have any form of cash management system in place.
A shortage of cash is the number one reason for business failure and can affect even successful profitable businesses, which grow too quickly.
So just how prepared are you? Do you know what your cash position is right now?
What about the position in three month’s time and in the year ahead?
Can you actually pay your key suppliers and your staff, and repay your loans and still draw enough money for yourself?
Could you run out of cash and, if you did, where would you go for the support to keep your business afloat?
Would you know how much you need to keep the business alive?
What would happen if you couldn’t get the funding you need for your business?
What about the impact on your house, your family, your employees?
What are the warning signs and what should you do to protect yourself and your business? Here are some obvious ones:
You are busy and profitable but have no cash in the bank;
You are not able to draw an income for yourself;
You are worried about how to find the money to meet your tax liabilities;
You are struggling to make loan repayments every month;
Your forward order book is shrinking;
Your average order value is declining;
You’re spending more time trying to recover debts from customers;
You are close to your overdraft limit and are delaying payments to suppliers and/or staff; and
Expensive equipment is not being used to its planned capacity
So what should you do?: You need to put in place measures to enable you to manage your cashflow and anticipate the peaks and troughs in demand so that you can take appropriate steps to mitigate potential problems.
If you do need to borrow, you will need evidence that you understand and actively manage the cash flows of your business to encourage banks to lend to you on reasonable terms.
Actions you can take include:
Plan and forecast your cashflow and update your forecasts regularly;
Set targets for key indicators in particular debtor, stock and creditor turnover (days);
Monitor cashflow performance against your plans and targets and take corrective action to bring cashflow into line with plans and targets;
Identify maximum cash requirements and plan steps necessary to secure funding and identify short term needs versus longer term ‘core’ funding requirements;
Put in place credit control measures to ensure cash is collected from customers on time;
Seek to extend accounts payable by either negotiating extended payment terms or indeed simply making sure the account is not paid even a day earlier than it should be;
Put in place inventory management procedures to minimise stock holding;
Make sure plans include payments for tax liabilities and loan repayments;
Justify all commitments in terms of cashflow generated and avoid unnecessary expenditure.
It is also important to realise that when a successful business grows it often places more pressure on cashflow which can lead to business failure, even though at a profit and loss level the business is successful.
In fact, it is poor cashflow rather than a lack of profitability that leads to many of the hundreds of thousands of business deaths seen every year in the UK! So what do you do to ensure that you are not one of these dying businesses?
Many business owners do, to put more and more money into your business without fixing the underlying problems.
First you have to identify the issues causing your cash shortage, understand what your business needs to look like and then put in place the measures to deliver these changes. It may be that you need to increase funding in the short term whilst these changes take effect, but only when you have remodelled the business, otherwise you could simply be throwing good money after bad.
Effectively there are five basic elements to managing your cashflow. These are:
1 The level of gross profit you make on sales (sales revenue less the direct cost of sales);
2 The level of debt you are owed by others and the speed at which this is paid;
3 The level of debt you owe to others and the speed at which this is paid;
4 The levels of stock you hold and the speed at which you rotate it;
5 The level of overheads you pay every month and the speed in which you pay them;
The key then is to taking these five elements and refining them in such a way as to build a model for your business allowing it to function effectively and within agreed funding levels.
This will give it the capacity for growth ensuring that these vital elements of your business work effectively and in harmony to build a cash generative business rather than one that always seems to require you to put more and more money in.
So what changes should you make?
It depends on the individual circumstances of your business but, for example, you could:
1 Improve gross profit increase selling prices, reduce cost prices, reduce direct costs, lower quality of goods, etc;
2 Improve the level of debt you are owed, shorten payment terms, improve debt collection process, reduce credit limits, etc;
3 Improve the level of debts you owe, extend payment terms, reduce ordering quantities, reduce lead times, etc;
4 Reduce the level of stock, reduce lead times, reduce order quantities, buy locally, implement minimum and maximum stock levels, reduce numbers of lines, etc.; and
5 Reduce overheads, reduce staffing levels, shop around for utilities, negotiate better terms, manage waste better, etc;.
So there is plenty that can be done to improve cashflow, the secret is knowing the model, what specifically to do and then implementing systems, processes and key performance indicators (KPI’s) to ensure:
a. It is done;
b. It is monitored; and
c. ongoing improvements to the model are continuously made.

This article has been reproduced from the Contract Flooring Journal. You can find them at