Table of Contents 1. How Has It Come To This? ................................ ................................ ................................ ................. 1 “It’s all my fault” ................................ ................................ ................................ ................................ .................... 1 The inspiration ................................ ................................ ................................ ................................ ...................... 1 Hidden dangers ................................ ................................ ................................ ................................ ..................... 1 Mind - set ................................ ................................ ................................ ................................ ................................ ... 3 Can I pull this off? ................................ ................................ ................................ ................................ .................. 4 2. Why You Didn’t See This Coming (... At Least Initially) ................................ .......................... 5 Poorly Conceived Financial Reports ................................ ................................ ................................ .............. 5 Looking For, & Looking At, The Wrong Things ................................ ................................ .......................... 5 The Tell - Tale Signs ................................ ................................ ................................ ................................ ............... 6 3. The Big Reveal ................................ ................................ ................................ ................................ ....... 7 4. Be Empowered By The Past ................................ ................................ ................................ .............. 9 What the balance sheet figures represent ................................ ................................ ................................ 12 What this template tells you ................................ ................................ ................................ .......................... 13 The role of profit ................................ ................................ ................................ ................................ ................ 14 5. Focus On The Right Figures ................................ ................................ ................................ ............ 16 Expectations ................................ ................................ ................................ ................................ ........................ 20 6. What Not To Do ................................ ................................ ................................ ................................ ... 21 DON’T... simply assume everything will work out okay in the end ................................ ................. 21 DON’T... assume your principal problem is money. ................................ ................................ .............. 22 DON’T... chase investment as your No.1 priority ................................ ................................ .................... 23 DON’T... blame your lender for your situation ................................ ................................ ........................ 25 DON’T... think of invoice - finance as a cash flow cure - all ................................ ................................ ..... 27 DON’T... think of cash flow in weekly terms ................................ ................................ ............................. 30 7. The Real Work Starts Here ................................ ................................ ................................ ............. 32 How to structure revenues ................................ ................................ ................................ ............................. 32 How to structure costs ................................ ................................ ................................ ................................ ..... 33 Why are balance sheet forecasts often absent? ................................ ................................ ...................... 34 Payable Strain ................................ ................................ ................................ ................................ ..................... 39 8. Next Steps ................................ ................................ ................................ ................................ .............. 43 Appendix 1 ................................ ................................ ................................ ................................ ................ 45 Cash accounting ................................ ................................ ................................ ................................ .................. 45 Get closer to your numbers ................................ ................................ ................................ ............................ 45 Look at these first ................................ ................................ ................................ ................................ .............. 46 Systematic book - keeping issu es ................................ ................................ ................................ ................... 46 Big - Bang ................................ ................................ ................................ ................................ ................................ 49 Fast - Track Financial Recovery Formula 1 Copyright Bottom Line Impact Ltd 2015 1. How Has It Come To This? First of all, welcome to the Fast - track Financial Recovery Formula. “It’s all my fault” Let’s get one thing clear... it doesn’t matter how cash pressures have come about... you are where you are. Emotionally, there is precious little to be gained (but plenty to lose) by dwelling on the past. So I suggest you go easy on yourself. You are more than likely an expert in your field but maybe finance is less of a stren gth But so what? Outside of finance , there are countless things I’m utterly hopeless at. There is no ‘ essential reading list ’ for directors and entrepreneurs, so don’t blame yourself if you’ve hit tough times and you’re not sure what to do for the best. Once you get to grips with what you need to do, any ‘ rabbit in the headlights ’ feeling will be a distant memory. The inspiration Finance may be for you, like it is for many, one of those areas where you might feel ‘ you don’t know what you don’t know ’ and thus instinctively fear the worst. If, right now, your bank balance is at a low ebb with bills to pay and you’re feeling ill at ease, demoralized and maybe out of your depth, I’m a great believer in how a little know - how can transform your outlook and per spective. Above all, once you know WHAT to do and what you need to prioritize, you can then decide what you can take on yourself right now and what you need help with and who is best placed to provide that. So in the case of the latter, you can more knowl edgably commission work from others, and be better placed to define the nature and precise scope of the work done. (As a result, you retain more control and make it less likely you’ll be taken advantage of.) Hidden dangers And there are many reasons you d on’t want to be at the mercy of others. Let’s face it... Fast - Track Financial Recovery Formula 2 Copyright Bottom Line Impact Ltd 2015 • Specialist turnaround advisers are cripplingly expensive (and of hugely varying capability whatever the ‘ paper qualifications ’ tell you). • Then you have your mainstream accountants (encompassing any you might employ internally and/or an external firm you might use for year - end accounts, payroll & VAT etc). Let me be frank wit h you... their strengths are accounting (maybe tax too) but largely compliance rather than commercially - led. Put simply, in the main, they lack the understanding and experience of financially - stressed businesses to advise appropriately. But they might well pretend otherwise, possibly because it’s a damned sight more interesting than what else they do. So just watch out for that. • Lenders (whether in the form of your local relationship manager or someone from a regional office or specialist function within a bank) haven’t run a business. That’s why they work in a bank. They get a monthly salary, bonus and regular promotions... but only if they put the bank’s interest first (i.e. maximise fees & minimise exposure). Worst of all, it’s not the guys you meet in per son (with the warm and reassuring words) who wield the real power but faceless characters in their Credit Team you never get to see or speak to directly. • Insolvency practitioners might present themselves as turnaround consultants (largely because it sounds better than any equivalent job title that has the word ‘ insolvency ’ in it). But meet them and very quickly they can seamlessly switch into trying to ‘ sell - you ’ on some sort of insolvency procedure as ‘... the safest option for you ’ or ‘... your best bet ’ using scare tactics (usually the threat of director’s disqualification etc) to get the outcome that suits them best. Inevitably this will be at a time when you’re in a vulnerable place. And let’s face it, if you’re a decent person, you don’t want to let others down... be they staff, suppliers or customers. It’s something Insolvency Practitioners are all too aware of. Sometimes, of course, a conversation in these terms is entirely appropriate. But much of the time it’s premature... encouraging you to give up needlessly without exploring ALL potential avenues to save your business without recourse to an insolvency procedure. And believe me, insolvency (in whatever form) is NEVER pain - free. Fast - Track Financial Recovery Formula 3 Copyright Bottom Line Impact Ltd 2015 Now the aforementioned are personal views... and others will doubtless take issue with them. Nevertheless, I hope it illustrates how the self - interest of those who might advise you could potentially colour their judgement and exploit any naivety on your part . In short, you need to be more self - reliant (i.e. know more yourself) about your situation and your priorities. Mind - set No escaping the fact you’ll need to don your ‘ hard - hat ’. More often than not, at the point you recognise your plight (i.e. the start ing line) you’re likely already feeling worn - down by the adversity you’ve personally had to contend with... • You can’t confide in those you work with. Or if the pressures are self - evident, staff look to you for strength, confidence and reassurance. Maybe you ’ve had to make staff (friends) redundant. • Your spouse and family typically only want to hear ‘ good ’ news or can simply resent the impact the business’s woes are having on them. • Friends are, for the most part, the fair - weather variety you wouldn’t want to confide in or distance themselves when you most need their support. It’s a time that really calls for inner strength. Putting a business right takes time... the road to recovery invariably proves to be longer than you’d like with more twists, turns and pot - holes than you envisage at the start. Certainly in the cases I’ve been involved in, there have been no ‘ magic bullets ’ although... Much more likely, if your experience mirrors that of others I’ve worked with, you will have noticed a negative momentum start to take hold such that to stop it, let alone reverse it, feels like it will take a monumental, super - human effort. Well indeed it might. My late colleague Brian, and I, once attended a meeting of turnaround pros. One of those who ran it recounted a case for so me 20 minutes, the nub of which was that on the wall of his client’s boardroom was a photo of some land so he asked about it. It turned out to be development land they then sold which resolved their cash pressures. Brian and I just looked at each other... n either of us had ever encountered nor could we ever imagine being involved in anything remotely so obvious. But maybe ‘magic bullets’ do sometimes exist. Fast - Track Financial Recovery Formula 4 Copyright Bottom Line Impact Ltd 2015 So get yourself in shape for the long - haul (maybe months). These are my fall - backs when the going gets tough (dismiss, tailor or simply ignore them as you see fit)... • Get fitter - gym, jogging etc. Helps create energy, focus and makes the stress easier to bear. • Brain - food that’s quick – egg, mussels (personal favourite) and (okay) decent coffee and choc (personal vices). • Vitamins – all legit. Some I find invaluable when pressures are intense. • Meditation – if you can’t sleep. I learned a cheat - way years ago which wasn’t too ‘ new - agey ’. The book was ‘Autogenic Training’ by K ai Kermani. Can I pull this off? Of course, there are no guarantees. But to whatever end, you need to find out fast. The examples in the video were pretty extreme cases and yet proved salvageable... if only just. That should, I hope, give you some belief your current predicament is not necessarily a lost cause. But everything depends on taking the RIGHT actions quickly and decisively. But whether cash flow problems are a recent phenomenon or if they’re long - standing, to crack them, you need 4 things... • F irst you need to spot things going awry (harder... much harder... in the early stages than many assume). You’ve likely passed this stage already! • Second (and not unrelated to the first) you need figures • Third, you need a strategy / plan. • And fourth, you need time Once you have the second you’re in a position to create the third. And once you have the third, you are better placed to buy yourself the fourth. But chances are, right now, you’re likely starting with just the first and none of the remaining thre e. Here’s why... Fast - Track Financial Recovery Formula 5 Copyright Bottom Line Impact Ltd 2015 2. Why You Didn’t See This Coming (... At Least Initially) A business rarely gets into difficulty overnight... it’s more of a gradual process. Sometimes (and typically in hindsight) the early signs are evident 2 - 3 years before a business hits the wall . Because this decline is subtle, it’s hard to spot. In truth, it’ s easy to explain away what probably appear to be isolated bits of bad news as temporary or exceptional . And it’s never all ‘bad’ – this will invariably be punctuated by occasional better news – the impact of which it’s human instinct to (inadvertently) am plify... to characterise blips as trends . Clearly this can serve to cloud the overall direction of travel. Poorly Conceived Financial Reports Conventional financial reporting makes it no easier to see what’s happening. You’ll typically find your financial information served up in discrete chunks... one month at a time ... with often two columns of figures... ‘ this month ’ and ‘ year - to - date ’. The emergin g trend (up or down) over a series of months is simply invisible. Even where graphs do feature in the financial reporting, they’re typically poorly conceived. And there is often little, if any, emphasis on the future. Looking For, & Looking At, The Wron g Things But notwithstanding the fact it’s hard to discern the gradual onset of problems over time and the unhelpful format of financial reports, perhaps the primary reason cash flow problems fail to be spotted promptly is simply because it’s not clear ho w to. On the face of it this might seem a little absurd but seen through the lens of what most organizations pay attention to in terms of ‘ financial management ’, it might make more sense... • Specifically, if your business has hitherto been focussed on profi t & loss (‘ P&L - centric’ we term it) and thus solely concerned with profit to the detriment of pretty much all else.... chances are, you will have missed the signs. • Allied to this if, within your organization, there is an absence of understanding of (and therefore focus on ) the balance sheet... the report in Fast - Track Financial Recovery Formula 6 Copyright Bottom Line Impact Ltd 2015 which you find the bank account (among other things)... this too would help explain why serious financial issues can seemingly come out of the blue. But if you recognise your approach to financial information in either (or perhaps both) of these hitherto, don’t feel bad... you’re in good company. What you’ve been paying attention to has been what you and everyone else has been conditioned to think ‘ matter s’. So if others m ake unhelpful and disparaging remarks about how you ‘ let ’ things get into whatever state you find yourself in... don’t waste time soul - searching. You’ve probably done no different to anyone else; you’re just a shade less fortunate. The Tell - Tale Signs But let’s not kid ourselves... if you’re reading this and living with the day - to - day issues that cash flow problems visit upon you, I probably don’t need to list them. Nevertheless it might help you to gauge just how many of the following you’re experiencing... [ but sorry, there are no prizes ]... • Suppliers chasing payment. (A greater number of suppliers, complaining more loudly, less tolerant & more threatening than before. That you’ve ‘ maxed - out ’ your available credit with them or that they’ve hit their own credit insurance limit on your account.) • No headroom in banking facilities. (Almost permanently against the ceiling on your overdraft or funds available from an invoice finance facility are perpetually fully drawn - down. Robbing Peter to pay Paul every day.) • Lender(s) reducing your facilities. (Either by limiting / withdrawing facilities or demanding new and more onerous & intrusive information / guarantees.) • Operational pressures & problems. (You can’t get the supplies you need for a job because you’re on ‘ st op ’ or a key employee or sub - contractor walks because of overdue / late payment / concern about the future. Equipment breaks because you’re pushing it beyond its capacity to try to keep the business going.) • Customers postponing work / disputing invoices. ( They either hear the rumours about your problems or you’re turning out work that isn’t up to scratch because of the intensity of the pressures you’re under.) Fast - Track Financial Recovery Formula 7 Copyright Bottom Line Impact Ltd 2015 3. The Big Reveal So what is this ‘ big ’ change in focus I alluded to in the video? It should be self - evident right? Well you might just have glossed over it or even missed it completely. [ Take a look back to the bottom of page 5 .] It’s shifting your attention from your profit & loss to your balance sheet This, in itself, is t he common denominator that binds together the outcomes achieved by every one of the 8 businesses featured in the video... THE reason why they escaped an otherwise inevitable fate. On the face of it, this might strike you as somewhat innocuous but believe me , this switching of focus represents a profound change of mind - set because, while you might not know it yet, it has you address the real causes of your cash flow pain. Why is this so significant? Why is it even necessary? So let’s take this one step at a time and go back to basics for a moment... Accounting transactions have two sides to every entry - a debit and a credit – hence the term double - entry book - keeping . In the vast majority of cases, one side of the transaction is posted to an account that is picked up within the profit & loss account while the other is posted to an account within the balance sheet . A sales transaction and purchase transaction below illustrate the point... Profit & Loss Account Balance Sheet Sales value What customers owe you Cost / Expense value What you owe suppliers When you experience cash flow problems, the pressures result directly from an inability to meet your payment commitments to others (your creditors). These can be in the form of... • Trade suppliers (aka accounts payable or trade creditors in the accounts) • The bank (in the form of an overdraft or other loans) Fast - Track Financial Recovery Formula 8 Copyright Bottom Line Impact Ltd 2015 • HM Revenue & Customs (or equivalent in your jurisdiction) in respect of VAT (i.e. sales tax), PAYE & NI (payroll tax) or tax on profits (income or corporation tax). The amounts you owe in respect of these are ONLY found in your balance sheet. In fact, if you were to attend any of our training you’d discover that the balance sheet is where ‘ financially ’, everything plays out In finance meetings, focusing on profit & loss in isolation is unwise... even in good times... but in tough times, it’s fatal. And lastly a further word of warning... If you are in a cash flow fix right now and the focus of your efforts (be they led internally or by external consultants / advisers) is majoring on profit & loss performance as your No.1 priority, get yourself different advice... fast. Fast - Track Financial Recovery Formula 9 Copyright Bottom Line Impact Ltd 2015 4. Be Empowered By The Past Right then, let’s ditch the emotional baggage associated with what’s gone wrong... you’re still here... you’re still in business. Maybe not by much... you’ll know that better than me... but while it helps to have a credible and tight story to ‘ explain away ’ your woes for external consumption, it ain’t your priority right now. So l et’s roll our sleeves up and see exactly what we CAN learn from the past. In simple terms, an organization that has cash flow problems will have been absorbing (not generating ) cash from the work it’s done... hence the pressures. In a sense this might seem obvious. But understanding exactly how to isolate the precise cause of this absorption can, on the face of it, seem an impossible task. But it’s simpler than you might think. You see, mounting cash flow problems stem from a growing disparity between TWO specific things... • the funding an organization needs; and • an organization’s capacity to source / generate the funding it needs. Strip away the terminology and, as you’ll soon discover, this is remarkably straightforward. So what we need to do is find the numbers that pertain to YOUR organization that explain exactly how these two have diverged from each other in recent times. (In other words, let’s try to make sense of how this adverse funding - gap has arisen). And getting the information you need should be dead - easy... it’s your balance sheet. Everything... and I mean EVERYTHING ... you need to know to get to the bottom of this is in your balance sheet. (Nothing to do with profit & loss .) So to do this exercise requires extract ing information from two balance sheets, each with a different date. Ideally your start date should be informed by two considerations... Fast - Track Financial Recovery Formula 10 Copyright Bottom Line Impact Ltd 2015 • A time when your financial position was at least somewhat better than now • The start of a financial year (the current one or alternatively (and no earlier than) the beginning of the prior financial year. Next, print the month - end balance sheet that pertains to your starting date. (So if your year - end is December 31 st , print the balance sheet as at 31 Dec 20xx.) Then print the month - end balance sheet for the most recent period for which your figures are complete in your books (e.g. 31 July 20xx). To help you, I’ve created a template below into which you can insert the requisite figures for yo ur organization (or equally, you might like to design your own). Apologies that it doesn’t quite fit on to a single page but if you’d like an Excel copy drop me an e - mail info@bottomlineimpact.co.uk Fast - Track Financial Recovery Formula 11 Copyright Bottom Line Impact Ltd 2015 A couple of initial points to note to help you fill this out correctly... 1] In this template we’ve made a few changes to the conventional balance sheet format... • First, we’ve moved ‘ cash investments & funds on deposit ’ from the section titled ‘ Assets ’ and inserted them within the section ‘ Net Debt / (Net Cash) ’. • We’ve split liabilities into effectively two groups, with all the ‘ finance - related ’ liabilitie s contained in the section titled ‘ Net Debt ’. This differs from the conventional format which groups liabilities based on... • Short - term (amounts falling due in less than one year) • Long - term (amounts falling due outside of one year) Consequently, where a specific liability has repayments due both within 12 months and beyond 12 months, you’ll have to add two figures together for the purposes of this template. So, for example, if your business has a bank Fast - Track Financial Recovery Formula 12 Copyright Bottom Line Impact Ltd 2015 term loan, the instalments repayable within the next 12 months will likely feature among short - term liabilities in your books, while those instalments repayable beyond that will sit within what will likely be classified a s long - term liabilities 2] The above template is geared to suit a standard limited company. For sole traders corporation tax should be supplanted by income tax and dividends won’t be relevant. And in the case of social enterprises and charities the Capi tal & Reserves section of the balance sheet would likely be structured somewhat differently. But make no mistake, the underlying approach remains entirely applicable. 3] For now, just enter your figures such as they are. Certainly don’t bother to enter ‘ p ence ’ and, depending on the size of your organization, there may well be merit in entering figures to the nearest ‘000. There will likely be plenty of lines you’ll leave blank – account headings that just aren’t pertinent to your organization. In Appendix 1 at the back of this e - book I help you validate the figures you’ve got (not only in this template but in your books in general) and highlight common shortcomings and errors you might encounter. 4] And look, if you’re already well outside of your comfort zone, and either you’re struggling and you’d welcome a helping hand or you’d just value a second opinion, you can always get in touch. What the balance sheet figures represent Like many, until now, you might have had little exposure to balance sheets per se so let me briefly summarize what the figures in this template (should) represent... • In the context of fixed assets , it is their value (net of depreciation) at the respective month - ends. • In the case of trade debtors , other debtors , trade creditors , VAT , PAYE & NI , corporation tax , dividends and all deb t, it is the amount outstanding at the balance sheet date. (i.e. the total that will ultimately be repaid by your organization to others or by others to you.) • Any balances on the remaining accounts (includ ing prepayments , accruals , deferred income and deferred tax ) reflect timing differences between the Fast - Track Financial Recovery Formula 13 Copyright Bottom Line Impact Ltd 2015 period in which a transaction is recognised in the books and the period to which that transaction actually relates. What this templat e tells you I explained on page 11 that cash pressures arise from a funding - gap... an inability to source / generate the funding an organization needs. Once completed, if you have cash pressures, this template should highlight why. Here is what I imagine you’ll find... [A] Assets – Highly likely these will have increased between the two dates if your cash pressures are growing. But by how much and which lines are the principal contributors? [B] Liabilities – You’ll see one of two things... • When cash is tight, if you continue to discharge your liabilities on time, the overall balance may have changed little but it’s highly likely that ‘ [ND] Net Debt ’ will have ballooned to compensate. • Alternatively, you’ll see liabilities increase significan tly. And if so, by how much? This can simply be a function of sales growth but in the context of cash pressures it typically means that commitments to creditors (sometimes both trade and crown ) cannot be made on time. Particularly the case when debt fundin g is restricted. [ND] Net Debt – Clearly, the movement you’ll witness here will be a function of what we’ve said about ‘[ B] Liabilities ’ above. But it’s not unusual to see Liabilities & Net Debt both climb. It depends on the individual circumstances of ea ch business. • Sometimes debt is just not an option given the nature of the business or the personal circumstances of those running it. • Other times, the consequences reneging on debt repayments (despite your cash flow ills) are so severe that you simply have to continue to meet them but inflict huge pressures on [B] Liabilities as a result. Something this template will highlight. So by how much has net debt changed and over Fast - Track Financial Recovery Formula 14 Copyright Bottom Line Impact Ltd 2015 what time period? What type of debt? How long will your facilities last? How much scope do you have to borrow more (if necessary) while the finances are put back on an even keel? [C&R] Capital & Re serves – Have you been profitable during this period (see ‘ retained profit ’ line). How have Capital & Reserves moved in relation to Net Debt ? Assuming, for now, that you’ve been able to complete the template satisfactorily, I hope you can start to see how this exercise helps reveal what’s been happening to your organization and (more importantly) ‘ why’ between these two dates. Most likely, the funding your organization needs ([A] – [L] ) has grown and/or profitability [C&R] has become, at least in relati ve terms, weaker. So you’re up and running but just be careful how you use this insight because... • This exercise might throw up movements that, on the face of it, don’t appear to make sense. But I’d urge caution. Don’t be too rash. It might be that you’re not interpreting what you’re seeing in the right way. • Also, it might be tempting to think that the solution lies in simply engaging reverse - gear in an attempt to rewind back to where you were at the start of this exercise. But that’s unlikely to be the b est approach or perhaps even feasible. And with time of the essence you can’t afford to set forth down the wrong track. And just to reiterate, if you’re stuck... if it’s simply beyond you... get in touch. The role of profit Before we move on, let me briefly reference profit & loss . Of course your organization’s profitability does play its part in cash flow - profit feeding through directly into the ‘ Retained Profit ’ line in your balance sheet... [C&R] above. But the bigger que stion is not whether you are profitable but whether you are profitable enough? The point being that other characteristics of your P&L performance impact your balance sheet indirectly – however their impact is typically much more significant than profit. I ’m talking here about turnover (its scale and the extent of any changes from one month to the next); similarly for costs Fast - Track Financial Recovery Formula 15 Copyright Bottom Line Impact Ltd 2015 and any changes in sales mix. All of these will feed through into the debtors, creditors and bank lines in your b alance sheet among others. And profit plays a big role in sentiment too. Key stakeholders – particularly lenders – attach great importance to profitability. To them, profitability is a proxy for viability and as such if you can demonstrate you’re not los s - making they’ll struggle to justify withdrawing support and be inclined to give you time to straighten things out. Fast - Track Financial Recovery Formula 16 Copyright Bottom Line Impact Ltd 2015 5. Focus On The Right Figures Few businesses are genuinely ‘ run by the numbers ’ and as such it’s almost inevitable that you won’t be close enough to your key figures. The implications are profound, particularly if you’re in a cash flow hole right now. See you probably track (and therefore know)... • The sales for the month • The margin you made on them (roughly) • Maybe your ope rating profit But these are, of course, all profit & loss figures. In our finance training we highlight the 3 figures you MUST keep on top of day in, day out... • Bank balance • Accounts Receivable (aka trade debtors / sales ledger) • Accounts Payable (aka trade creditors / purchase ledger) Needless to say, they’re all reported in the balance sheet ( NOT the profit & loss account). Now few would likely be found wanting when it comes to knowing their bank balance (at least roughly). But plenty are less familiar w ith the latter two. And that matters because, in large part, your accounts receivable will be tomorrow’s receipts; accounts payable, tomorrow’s payments. In this regard, what I notice with clients living hand - to - mouth is that they are often fixated about the money they can chase in and the cash they have to pay out – the receipts and payments – but in so doing, they lose sight of the overall balances. The upshot is this... Accounts Receivable – At any point in time it’s the outstanding balance you need to fund. So if you do a job for £1,000 but give someone 30 days to pay, in that 30 days it creates a £1,000 cash flow hole in your business. This is because you’ve done work but been paid nothin g for it. Technically, you’ve done the work for free . [ Yes, galling isn’t it? ] Once they pay, that hole disappears but in the meantime you will have likely had other sales transactions that will have created new holes that you Fast - Track Financial Recovery Formula 17 Copyright Bottom Line Impact Ltd 2015 have to fund from somewhere. Don’t get me wrong, I ‘ get ’ that receipts matter but there is a bigger picture you’re likely missing. Businesses don’t run out of money (i.e. go bust) because nobody owes them anything. Most run out of cash because they’re owed lots. But the money is in their customers’ bank accounts and not in theirs! Many clients experience a reducing accounts receivable balance when they’re in trouble as their eye is taken away from selling to focus on the finances. It’s a double - edged sword. There is less of an outstanding balance to fund right now but there will be less cash to collect in due course which will dent cash flow in due course. Conversely, if the accounts receivable balance is rising, this typically represents the ramping up of sales efforts and (if secured on less than ideal terms) can undermine cash flow equally (if not more effectively) than if the balance is dropping. This is because you are needing to fund a growing accounts receivable balance but which in due time will yield more receipts. Accounts Payable – At any point in time, the credit given to you by suppliers is a source of funding for your business that you’d oth erwise have to find from a bank or investors. So in this respect it’s really valuable. Look, if a supplier gives you 30 days to pay a £1,000 invoice, that’s taken care of the £1,000 cash flow hole created by virtue of what your customer owes you. It’s like accounts receivable but in reverse. So a rising accounts payable balance (which is almost invariably the case with mounting cash pressures) means you’re taking in more invoices than you’re paying off. In other words, you’re becoming more indebted to you r suppliers over time. It’s something you need to be acutely aware of. To help you, we’ll touch on the concept of ‘ payable - strain ’ a little later. So you need to be really close to what’s I can readily recall a printer client who, by virtue of his father dying, a fall - out with his co - director, a dispute with his landlord and lender issues, found himself with vanishingly little time to actually sell. It was a killer. And as cash pressures intensify you have to be disciplined in how you deal with these distractions. A past client who found himself in this predicament was seeking to compensate for a significant bad debt and was someone who could ‘sell’. Unfortunately, the term s on which he did so, created a much higher accounts receivable that ran way ahead of the business’s ability to fund it. Fast - Track Financial Recovery Formula 18 Copyright Bottom Line Impact Ltd 2015 happening to this balance... by how much is it increasing? Above what ‘£’ level would you not want to pick up the phone fearing it to more likely be a supplier chasing payment, than a prospective customer? But maybe, despite cash flow problems, the balance is droppi ng. There are always exceptions, even with this... So you might, at this point, throw your arms up in the air and despair... “Up or down, I can’t win.” But that w ould be to miss the point because the way to systematically crack cash flow problems is to quantify how much... • Customers will owe you at a specific date (because that’s how much funding you’ll need to find). • You will owe suppliers (trade, crown & lenders) at a specific date (because that’s how much funding you’ll have available). It’s the opposite to how everyone else works (i.e. focussing on receipts & payments over a period of time). You could say that by adopting the perspective I’m suggesting you’re l ooking at the static position that results from a series of transactions - invoices & cash movements over a period of time (e.g. a month), not the transactions themselves. Because it’s only by understanding what’s driving the movement and direction of the se balances (and gauging whether the resulting picture is fundable) that we can start to put cash flow right and the business back on track. And just to demonstrate how this works in practice, I’ll briefly summarise the key facts concerning each of the 8 b usinesses that featured in the video. (Maybe review the video on the website as you read them.) The client whose book - keeper left and as a short - term stop - gap had one of their staff take - over. Without proper supervision, it transpired that he was someone who was unable to say ‘No’ to suppliers deman ding payment. He paired down the purchase ledger to such an extent that they subsequently couldn’t pay the wages within their overdraft limit.