PLAN AHEAD

All businesses, particularly SMEs, keep an eye on cash.
Most will know to the nearest £ what their bank balance is at close of business last night.
A few might even have the link to on-line banking on their computer or mobile device on continuously.

Fewer, however, look ahead to see if there will be enough cash to pay future salaries and other bills.

How often have you thought that “There’s too much month left at the end of the money”?

This is where a forecast can come in handy, says Ian Ross, a Chartered Management Accountant and Associate in the North West for Beer & Young Ltd.

The ideal forecast will have visibility for at least 13 weeks, and will be split into weeks.

Why 13 weeks?

This period has been chosen so that it covers at least one VAT payment date. The payment of VAT, whilst predictable exactly in terms of the date and approximately in terms of the value, is usually the payment that catches a business unawares.

Forecasting the timing of receipts from customers is more tricky. If you have good records and a close business relationship with your key customers, you can usually predict to within a day or two when they will pay, and how reliable a promise to pay really is. By predicting the amount to be paid for the main customers individually, this will leave a smaller value of “others” to predict.

Forecasting the payments made through standing orders and direct debits is usually reasonably easy. Predicting wages and salaries and the related PAYE and NI is generally not too problematic. Any remaining cash available will go to the suppliers , where the critical suppliers will be paid first.

With luck, there will be some money left over for the owner.

Even in the best-organised businesses, this forecasting and control of cash can sometimes lead to a situation where outgoings exceed income.

If this can be predicted in terms of time and amount, the bank or main lender is usually the first port of call. Armed with your cash flow forecast, this will provide a good basis for a sensible discussion.

If the bank is unwilling to lend more, then what other options are available?

Asset-based lending or ABL, using property or debtors as security is a popular way to fund a growing business. Make sure you understand all the rules associated with credit checking customers, concentration of debt (that is, having a high proportion of debt in the hands of a small number of customers) and recourse (that is, what happens if the invoice is more than 90 days overdue).

Sometimes ABL is not an option and more radical options are needed.
One such is to consider selling a minority stake in your business and bringing in an extra business partner who contributes not only cash but expertise. This route can provide a lifeline for good businesses that may be struggling temporarily and needs additional senior resource. It can be a lonely place running a business and ultimately it is better to have 70% of something with a substantial future than 100% of something with limited prospects.

An incoming investor will usually bring significant added value to a business and open doors that the existing management could only dream about. This creates a real ‘win-win’ where the aspirations of all the parties can be achieved.

Whatever you do, take the appropriate specialist advice from professionals you trust and remember the old saying...Plan ahead. It wasn’t raining when Noah started building the ark.

To contact Ian or find out more about equity investors, e-mail ian.ross@beerandyoung.com or his colleague shon.laird@beerandyoung.com