When Will You Run Out of Money?

Thames Water will run out of money in 6 months.

Denby had traded for 217 years and despite flagging this issue and the company went bust 6 weeks later.

When will your business run out of money?

This is a critical question for start ups developing a disruptive products and services. But as businesses start to generate revenue and employing people this question tends to drop off the radar until its too late.

Profitable businesses go bust because they run out of cash.

There are numerous reasons why businesses go bust but money is usually at the root of all their problems. Sadly thousands of SME's experience this every year.

But can it be avoided?

More often than not, it can be avoided. Here are 10 disciplines to make sure that cash management gives companies a better chance of survival.

1. Don't let employees spend your money. You and only you should authorise purchases
2. Have a purchase order system that is rigorously enforced
3. Check outgoing direct debits, standing order subscriptions every month. Cull quickly when no longer needed.
4. Do not give credit
5. If you do give credit make sure your credit control is exceptionally good
6. Stop trading with clients who don't pay. They must go 'on stop' as soon as a payment is missed. No excuses. Just because they keep ordering doesn't mean they are a good client - quite the opposite
7. Check your bank balance every day. Reconcile regularly and deduct all pending payments from the total balance. These are 2 numbers that you should be able to hold in your head
8. Don't buy a new car just because the bank balance looks good today!
9. Don't assume your every one in your sales pipeline will actually buy. Review and refresh it regularly. Make plans for every one buying and no-one buying!
10. Don't assume that existing clients will renew contracts, buy again. Some are silently walking away...

The biggest discipline is planning for different scenarios. As a minimum use optimistic, pessimistic and realistic projections. Ruthlessly re-forecast regularly. Know the best upside and plan for it BUT know the worst down side and plan for that too.

One of my clients hated numbers, didn't understand them. He had number dyscalulia - just like dyslexia but for numbers. Despite this he had to manage the business and that involved numbers. There was no choice.

The solution. He worked with his bookkeeper and accountant to develop a pictorial dashboard, pie charts bar charts; red slice for under performance and green for better than. Once this was in place, managing the business became easier. And then the KPI dashboard became a pictorial one too.

As a director you have a legal responsibility to run a going concern, so numbers planning is crucial. It a no debate skill that you must have in your kit bag. If numbers are hard for you - work closely with your bookkeeper to set up pictorial dashboards to help you.