Coping with Difficulties

Question

I run a regional 3 store retailing operation and am not sleeping because my cash flow is out of control. I prepared budgets at the start of the year with my Accountant and, although sales have been worse than budgeted, my cash flow is a lot worse and I can’t figure out why. In the short term I’ve extended my overdraft at the bank but with sales continuing at low levels I’m not sure if these will suffice, and now I’m bumping up against my overdraft limit again. What should I do?

Colin Mills of the FD Centre writes:

This is not an uncommon situation in many smaller business situations, where business turns down. The good news is, if you take the right action quickly, usually you will get the business back on track quite, the bad news is left untreated will continue to cause real distress for the business owner, and sometimes failure for the business.

Firstly you must get an immediate grip on where you are in financial terms, and then get some visibility on where the business is heading. Once you have a clear picture of where you are and where you are heading in cash terms you will be able to decide what needs to be done, and where you need to go to get any further help. If you don’t the usual implication is that you will hit a brick wall, you just don’t know when!

Key action steps are as follows:-

1. Ensure monthly management accounts up to date and accurate. This should include a profit statement, balance sheet, and cash flow report. Compare this to your original budget and understand the differences. There may be other reasons for your cash shortfall, other than just sales. A good analysis will tell you what these are.
2. Update your forecast cash flow. Firstly, on a receipts and payments basis by week over the next two months, and also by month for the next year. This will tell you whether you problem is going to go away, or whether you need to take more drastic action. It will also at as the basis for discussing your position with funders who may be able to help.
3. Use the combination of actual information and forecast performance to work out a short and longer term recovery plan.

3 things to remember:-

• Take action now! The longer you delay and not take action, the worst your situation may become, the more you will worry and the less help you might get from banks or others.
• If you don’t have the finance skill sets within the business to action the above rapidly, bring in the expertise to do this. Banks will get comfort from well prepared management accounts and financial forecasts, analysis and commentary, if they are professionally prepared and they will get even more comfortable with the business if they can talk numbers with finance professionals talking on behalf of the business. You will also get the advantage of people who will be able to negotiate advice on the options available to you!
• Repeat the process on a regular basis. Don’t treat this exercise as a one off. In a business suffering difficulties, it’s vital you have a constant picture of where the business is and where it is going and whether the actions you are taking are working, and understanding what else might be changing. The business will change!

 

Colin Mills is founder of the FD Centre, the leading provider of part-time Finance Directors, available to growing businesses.

www.thefdcentre.co.uk