Cash flow is king during a recession. Here’s how to achieve it

Alastair Thomson is the author of Cash Flow Surge, a hands-on guide for business owners.

As a specialist in helping businesses increase revenues, reduce costs and build stronger cash flow, I asked him what steps management teams can take now to help build resilience. Here’s what he had to say.

1.     UK business is experiencing a sustained period of economic and political turbulence and uncertainty. What should business owners be doing and thinking right now?

In conditions of uncertainty, businesses need to stay “light on their toes”. In particular, they should think carefully about how much of their monthly costs are fixed costs (eg rent, where the same amount is paid out each month) and how much are variable costs (eg computer software, which is sometimes charged according to how many active users were on your system in the last 30 days).

While it’s rarely possible to have every cost as a variable cost, you want as many of your costs to be as variable as you can. That means if your business hits hard times, your costs scale down automatically as your activity scales down. It won’t solve all your problems, but that strategy will go a long way to solving a lot of them.

For the fixed costs you do have, like rent, lease payments on company cars and so on, ask yourself whether you’re really getting full value from them. If your office (where rent, rates, utilities, etc are usually fixed costs) is only half-full of people, maybe look for some premises more suited to the size of workforce you have now and take your fixed costs down a notch or two while you have the opportunity. And do it ahead of the curve – don’t wait until it’s the only option. Do it now.

2.     What top tips would you give to someone looking to boost their cash flow?

a) Think about the extra services, directly related to what you do now, you could offer to your existing clients. As long as you’ve provided them with a good service until now, a reasonable number should say yes, your sales cost should be close to zero, and you can start generating extra cash flow today.

Even simple things mount up. For example, could you offer a premium, next-day service for 10-20% more than it costs normally? Not all clients will want that, but for those who do (provided you’ve got your operations lined up to deliver that service) you make more profit doing exactly the same as you do now.

b) Always have a ‘top, middle and bottom’ offer structure like the big supermarkets. There’s always Tesco Finest, Tesco Standard and Tesco Value. That way if someone walks into their store for just about any product under the sun, the perfect solution for their budget is on the shelf, ready to buy.

Don’t lose value shoppers after you’ve done all the hard work on marketing and sales to get them into your store. And don’t miss out on profit opportunities from premium customers because all you have is bargain-basement offers. For people with money to spend, that can be a real turn-off.

c) Prompt your customers to re-order, don’t leave it up to them to remember. If you can get a monthly subscription service, even better. But if you can’t and (say) your standard product should last your customer for about a month, 7-10 days before each month is up send a short email reminder to make sure they get a fresh supply of your product or service before they run out.

While your business is always at the forefront of your mind, you’ll be lucky if most of your customers think about it once in a blue moon.

So take all the hard work out the process for them by (gently and politely) nudging them into ordering their next month’s supply on time. If they run out and don’t remember to re-order within a couple of days, the likelihood is that’s the last you’ll ever hear of them. And remember - you won’t generate a penny in cash flow from a customer you don’t have any more.

3.     What’s the most common mistake that business owners make and what should they be doing instead?

They focus on reducing costs when they would probably make more money overall by thinking of ways to increase revenues.

If I buy something for £1 and sell it for £2, that’s not a bad business.

But if I could buy a similar product for £2 and sell it for £5, that’s a much better business.

So don’t obsess over costs. Obsess over what you can sell your products for. As long as you provide extra value that more than compensates for any extra cost, you’ll almost always be better off by spending more money up-front but selling it for an even bigger margin than you do now.

4.     Financial reviews and accounts provide a useful look at what’s happening with a business but can be backwards facing. What else should management teams consider as part of their strategic planning?

My rough rule of thumb is that management teams should be looking forward two-thirds of the time and looking backwards one-third. My favourite way to do this is to combine a couple of accounting techniques (sorry, even my eyes glazed over there…) which identify the real cost drivers in your business, and then overlay daily/weekly/monthly activity levels to generate a meaningful forward view of profits and cash flow.

On the off-chance you’re interested, the two techniques I combine for this purpose are Activity Based Costing and Zero Based Budgeting – but the latter in particular can be dangerous in the wrong hands, so be careful if you try that one out!

5.     If you had the power to influence government, what one policy would you change?

How long have you got…

Governments tend to be great at tracking costs and poor at tracking benefits. This results in them often spending more than they have to in order to fix problems. Yes, trying to save money in an unsustainable way actually costs more money than it saves!

A classic example is the long-term underinvestment in social care which dramatically increases the cost of running the NHS because people are kept in hospital (very expensive) instead of being looked after in a properly funded system of social care (much cheaper).

Investing in social care sounds like '“spending more money”. But it would actually save billions a year, if anyone bothered to do the calculations.

Not only that – it would also ensure much better outcomes for those who need a hospital bed, but can’t get one at the moment because there’s no social care setting to discharge the current occupant of their bed to. What’s more, for those who are discharged from hospital into social care, this is often a much more appropriate setting for their needs, which means they get better outcomes too. And all at a lower overall cost.

Similar challenges apply in education (especially schools and further education colleges), transport and infrastructure investment.

So do a better job of joining the dots, would be my recommendation. And employ much better accountants – this stuff isn’t especially hard. Someone at the Treasury, or the responsible government department, just needs to join the dots more often than they do at the moment.

Find out more about Alastair and Cash Flow Surge at www.CashFlowSurgeBook.com.