Is your SME cashflow insured? I’m not talking about a policy here…

May 21, 2017 | Andy Blandford

In simple terms, all businesses seek to either exploit a market gap or compete on efficiency against competitors. Businesses face a variety of risks every day, yet many of them thrive and prosper. Whereas some do not. And others fail. Why is this? There is no single answer here. But there is a common theme in many cases: Cashflow.

Cashflow is the lifeblood of any business, and it is how that cash flow is managed and safeguarded that often determines success or failure. Cashflow is delivered from sales or funding which in turn meet operating and reinvestment costs. In the early business stages, sales revenues are often insufficient so the business relies upon funding of one kind or another. After several years, this usually reverses and the business transitions into the land of profit. In my experience, it is this ‘transition’ that represents perhaps the most significant risk for young businesses.

Generally, most businesses become profitable after 2-3 years if they survive. Studies show that around 25-30% of all new businesses fail inside the first two years, and half of all new businesses will fail inside 5 years. More significantly, up to 30% of new businesses fail between their 2nd and 5th year despite becoming profitable!

In the early years, the business is ‘lean-and-mean’, where building sales revenue is the primary focus and almost everything else is secondary. Once the business becomes progressively more profitable, there is the temptation to shift some focus and priorities internally toward attending to the things it previously ignored or deferred. There is also real pressure to reward staff for their sacrifices and loyalty through those earlier years. And it is these conflicting agendas that are dangerous to a young business trying now to run despite having just learned to walk.

This is a natural evolution and human nature at work, so it should not be dismissed lightly. In fact, such should be considered in the next steps for your business development. So, how do you now keep all your stakeholders happy? You can’t. However, there are several effective ways you can manage these conflictive agendas and still survive, develop and prosper.

Firstly, you need to recognise that your business priorities haven’t really changed much since before it became profitable. It is simply that other priorities have now become more important than they were previously. It makes sense, therefore, to consolidate these expanded priorities into your planning, goals and resource allocations going forward. Such will enable you to see these objectively and holistically, and better construct a programme of progressive implementation.

Secondly, you will need to engage your stakeholders in your development plan by communicating their respective role and collective responsibilities to deliver this plan. Failure to do this effectively across all stakeholder groups can cause resistance, morale problems and even sabotage. You should not forget that in the beginning, you engaged and motivated all your stakeholders to support, make sacrifices, and drive your business with you. Your approach to this critical stage should, therefore, be similar to your previous ‘script’, but with new content, objectives, and responsibilities.

Thirdly, and as importantly, you need to think laterally with your spending and investment plans. What contingencies does your plan have if sales receipts stumble; or don’t accelerate in line with your promises to stakeholders; or operating costs outstrip receipts? Did your plan expand the scope and breadth of your cash reserves and also include contingent provisions?

While your stakeholders will need to see you spending and investing the realised profits, some of it you should spend ‘differently’. Your plan should expand current account surpluses to meet larger revenue fluctuations and to fund development progressively. If the surplus outstrips expectations you could face pressure from various stakeholders to accelerate or compound your development plan, adding to your development risks. However, if you had regularly ‘spent’ some receipts to build an external contingent provision, the surplus would be smaller and less tempting. Most importantly, that contingent provision now acts as your SME cashflow insurance, where it can be called on if your operating cash reserve is insufficient or lines of credit fail.

Unlike the current account or conventional insurance, your cashflow insurance can be invested into fixed deposits, bonds and stocks so it ‘pays its way’ until you need it. Over time it grows, and if you didn’t need it, after all, you could use it toward expansion or acquisition projects. Just because you created it as a form of insurance does not mean you have to operate it like an ‘insurance policy’.

For a variety of reasons, too many SME’s operate only a veneer of contingent provisions that are too often ineffective when the hammer drops. Cashflow ‘insurance’ has helped and saved a good number of my SME clients through the years.