by Real Business - Thursday, 30th August 2007

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You don’t understand your cash-flow

In less sophisticated times, entrepreneurs ran their businesses on the backs of envelopes on the basis of their cashflow. They weren’t wrong. Fundamental to the survival of any business is the leader’s deep understanding of the company’s cash-flow. Remember, accounts show profit on the basis of sales made, but it’s the cash that sustains it.

Cash has always been Jeff Wilson’s watchword. “If you stopped me in the street, I would always know my cash-flow situation,” says the founder-chairman of Telsis. “If you really want to succeed in business, you must accept that you will lose control of your life. But you can’t lose control of your cash-flow - if you do, the whole lot goes.”

If you don’t fully understand, don’t be intimidated by the accountants - after all you pay them - make sure they explain to you the assumptions they’ve made in the cash forecasts and ensure that you can follow the daily ebb and flow of cash in your business. If it’s still not clear, work out the cashflow for a short period on your own until you know exactly what’s happening.

Morale is low
It’s a sure sign that something is amiss if your people aren’t happy, vibrant and firing on all cylinders. Check staff absenteeism and staff turnover. Are they on the increase? If people leave the business, find out why. Do employees know what you’re trying to achieve and what they are expected to contribute? Or are you just loading them with tasks?

If you’re having trouble recruiting, it may indicate that that the rewards are not right or that it is known that you’re not fun to work for. Should you consider share ownership schemes? Perhaps your people spend their time on office politics and blaming each other because you haven’t made them accountable for fixing things. If your people are over-stressed, there is something wrong with the way you are running things. It will spill over into customer service and efficiency.

Worry if there “isn’t a buzz about the place - people interacting,” warns Gordon Brown, managing director of Teleadapt. Worry, too, if no-one is prepared to challenge you or come forward with new ideas.

Build a team that feels cohesive, says Jeff Wilson. Then you can withstand the inevitable periods when morale is low. “If anyone ever gets down, then the other members can carry them.”

Employees on the shop floor know long before management if something is wrong, says business consultant Lindsay Melvin - especially when you’re launching a new product. Don’t get out of touch with your people; let them fully contribute to your business. And how do you tap into the state of morale? “Have excellent intelligence networks,” says Mark Dixon of Regus. For many business people, that means using a personal assistant as their eyes and ears.

You’re not collecting your debts
Fast-growing companies often fail to put in the systems to ensure that debts are collected promptly. Some customers make it a policy to pay only those who shout - if you’re not in there shouting, there’s no money for you. Or perhaps your clients are major players and you’re afraid to ask for your money. Restaurant entrepreneur Jerry Brand insists you should “see your customers, explain that you are starting out and that you have the money for your capital but not to support their business. They’ll respond well. The one in ten who doesn’t - well do you really want them as a customer?”

“If people owe you money, take no prisoners to collect,” advises Adrian Barbieri. “A customer is not a customer until they have paid the bill. People confuse commerce with banking. Have a clear policy. And after talking to a client about the deal, in the same breath ask ‘who should I be collecting my money from and what is your normal policy for paying’?”

You lose control of your life
Tricky one, this. If you are building up a business, your private life is almost bound to slip, says Jeff Wilson. “Especially with a product-based business, I can’t see how you go from zero to launch without working non-stop.” Bob Jones agrees. “To be honest, you have to be fully committed,” he says.

Still, there are indicators that matters are getting out of hand. When nearly all your waking hours are spent at work; you’ve forgotten what the children look like; you’ve no time to stand and stare; be sure that your business will be getting into trouble. Over-tired, over-worked people are not good decision-makers.

Are you brave enough to ask your family what they think? They’re the first to know if you are going over the edge. Impatience coupled with loss of temper and sense of humour are the tell-tale signs. “If your secretary is screaming at you, something is seriously wrong,” suggested one respondent’s secretary as she tried to manage an over-burdened day.

You don’t know your gross margin
If you don’t know your gross margin, you’re out of control. It’s not good enough to use a standard margin for your management accounts. You need a good stock and accounting system so that you know your real margin quickly and don’t find out months later that your profit has gone. How much money are you making directly from each sale? It’s tempting to drop prices to compete, but what sort of profit will it leave you and how much more will you have to sell to make up for the lost profit? Model the effect of decisions that will change your gross margin before taking the plunge. Know the impact in advance.

If you sell a mixture of products or a mixture of services, do you know which ones are profitable and which are less so? Companies often allow high profitability lines to hide the poor performers and the management doesn’t realise how little they are making on some lines until it’s too late, says David Buchler, senior partner at accountants Buchler Phillips.

Decision-making is poor
It’s very easy to be over-emotional and sentimental when making decisions about your own business. Have someone outside the business who will act as a sounding board and challenge you to make a proper case for your decisions - or even to make a decision if you’ve been hesitating too long. “Fail fast,” advises Gary Ashworth, chairman and chief executive of Abacus Recruitment Consultancy, the fastest growing company on the AIM market for the last two years. “Try lots of new things and keep what works.”

If you find you’re facing decisions that take you way out of your depth, get help, get training and review decisions that go wrong to uncover the lessons to be learned. Maybe you need a non-executive director. “The job of being a managing director is very lonely,” says Bob Jones. “Every MD needs their own Marjorie Proops.”

You focus on your personal lifestyle
Very plush offices, very expensive cars and holidays all indicate that you are taking your eye off the ball. You might be very successful now, but if you lose your focus the business can go wrong quickly. “One of my clients had a double bed and mirror on the ceiling in a room next to his beautiful office,” remembers Andrew Godfrey, head of growth and development at Grant Thornton. “His secretary’s skills were limited but he seemed very fond of her.”

Some people have difficulty separating their business and personal expenses. As a result, they don’t know the actual cost of running their business. “This is especially true in family companies - wife, sons and daughters all being paid salaries whether they contribute or not,” says Ian Fitz-Harris, chief executive of Euro Sales Finance. “I’ve even seen school fees in the business accounts.”

You depend on your management accounts to know what’s happening in your business
That’s much too late. You should have a good idea about performance before you see the accounts. Businesses have rhythms which you need to understand and to know what changes are impinging on those rhythms. Careful attention to many of the factors mentioned above will mean that you are fully appraised of the state of your business long before the accounts are churned out. They should be there as confirmation about what you already know.

Look for the contradictions in written and verbal reports. They mean that someone is hiding something or doesn’t understand the problem fully. Look into it in detail until you find out which report is accurate.

You’ve got no new ideas
It is essential to have a stream of ideas working through the business which lead to new products and services. If you don’t think of improvements to your products or services, your competitors will. Adrian Barbieri, who heads catering firm Figaro Trading, has a mantra for avoiding such circumstances: “Re-market yourself; never be complacent; always look to be innovative.”

Customers’ needs and demands change quickly. Simply improving what you are already doing is not enough. Successful businesses constantly introduce new, differentiated products or services and exceed their customers’ expectations with them.

Sadly, leaders often become isolated from their customers. When did you last watch a customer use your product or service? It could give you some great ideas about what they need next.

You’re anxious
When you’re immersed in your business, you develop a kind of sixth sense about it, based on all the small details you pick up every day without perhaps analysing them. It’s the reason great entrepreneurs often move against the market trend, because they have absorbed so much information they sense that a change is on its way. So when you have an uncomfortable feeling that there is something wrong, trust your instincts and start looking for the problem. There is “floating anxiety” in business, says pricing specialist John Winkler. “You can’t put your finger on it but it is there and you are probably right.”

Keep your instincts alive. “Is everyone tied up in meetings the whole time? If so, they’re losing their sense of what they are there for,” says IT entrepreneur Bob Jones. “There has to be a balance between planning and getting the job done.”

Watch for changes in patterns, don’t be mesmerised by comparing your results with targets and forecasts, look carefully at the comparison with the previous period. What’s changing and does it match your expectations? Ferret around until you find the root of your anxiety.

Your customers are not happy
It’s vital to find out whether your customers are satisfied. Problems caught early enough will save you thousands of pounds in otherwise lost business.

“If the complaints start bubbling through, take some, go through them in detail and understand what is happening in your business,” advises Jerry Brand. “See precisely what has been done and check whether it agrees with what you were told.”

“Irrationally, business people insist that the competition is not as good and that the customers are making stupid decisions,” says business strategy consultant Rodney Drew. Blaming the customer is not the road to recovery.

How else can you tell that all is not well with your customers? Maybe they are not ringing you up any more for a chat; or paying more slowly than in the past because they have queries or they are not happy; or are you seeing increases in credits and allowances to customers?

A detailed review of an increasing work-in-progress and debtors will tell you practically everything you need to know: the relationship with customers, the quality of your procedures, the speed of response, customer satisfaction, the quality of your people. If any of these is going badly it will show in the inability of your people to send out theinvoices and collect the cash.

Your customer base is not expanding
Over-reliance on a few large customers has been the downfall of many businesses. The client company can either go bust or drives such hard bargains that your profit is squeezed out. Your marketing strategy should address the expansion of your customer base. If it’s there, but not happening, perhaps something is wrong with your distributors. Has your product got lost in the pile? Would you be better off using your own people or haven’t you got enough of them to follow up opportunities properly?

“If leads to new business are falling, you’re seeing your sales problem six months ahead,” warns John Winkler. Perhaps there is something wrong with the service or product, perhaps it is the way you are marketing, perhaps it’s because your leads are weaker than before. Track your leads-to-sales conversion rates and look in detail at any decline.

You don’t like work anymore
There was a moment, recalls Gordon Brown, when he’d had enough. “After a particularly dreadful day I said: ‘I quit.’ I knew then that I had to make changes to the business.”

If you, the managing director, don’t want to go to work, something really is wrong. But don’t give up. Business requires a great deal of hard, meticulous work. So bring people in to cover those areas you’re not good at and ensure that all the necessary, key skills are covered.

Entrepreneurs should decide right at the beginning what a balanced team will look like, says Colin Knight, an investor in high-tech start-ups. “One of my clients, a scientist with a very good product, had the sense to realise he was not managing director material; he became the technical director instead.”

Your technology isn’t delivering
When your people start complaining about the IT in the business, take notice. They probably haven’t got the tools they need to help the business succeed or the systems are overloaded and performing very slowly. People need to be properly trained to be effective. However, Rob Wirszycz of the Computer Software Services Association warns that “if you find that your people are Microsoft world champions at solitaire you’ve got problems.” If your e-mail is filled with messages to your staff’s friends and family, your people have lost focus, there’s a lack of management control and you need proper guidelines for the effective and appropriate use of the technology.

“The danger with technology is that the pendulum swings too far,” says Bob Jones. “You can become too inward-looking. My rule is, any infrastructure changes have to last for a minimum three years.”

Contacts
Ann Baldwin FCA is a management trainer. Tel: 01453-843 046

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