In parts 1, 2 and 3 of our cash strategist series, we looked at how your choices over Branding, Routes to Market, Production facilities and Stock levels impact your cash balance, and how you can structure your business model in the most cash-friendly manner. Here, in part 4, we cover other key costs and cash injections, and how to bring together all of the moving parts into an action plan and summary.
As your business grows, so will your staffing costs.
Your staff are critical: they will make or break your business. It is vital that you treat them well, and that they want to stay with you. Recruiting new people is a time consuming and expensive occupation which can distract you from the core focus of running your business, so make sure you keep hold of good staff members when you find them.
In cash terms, this means paying them the right amount, every month, without fail. If you are struggling with cash, your staff should be the last group you pay late.
When’s Pay Day?
Staffing can be one of your biggest costs, which means that having enough ready cash for Pay Day can be a real headache.
Understanding your business model and cash cycle will help you here. If you know you get paid by a supermarket on the 30th of the month, don’t sweat it out over a monthly Pay Day on the 25th. You can decide when Pay Day is, so pick the 1st or 5th of the month instead, when your coffers have been topped up by the supermarket. As long as the date is fixed and stuck to, you can time Pay Day to your advantage within your cash flow model.
You might consider staggering Pay Day across the month for different teams. One company we worked with paid half of their staff teams on the 15th of the month, with the other teams being paid at the end of the month. This reduced the cash pressure at these two points in time.
Note: Although there were two Pay Days in this company, no staff had their personal pay date switched between months by the company. Each person was always paid on the exact same day each month.
If you are struggling for cash, you do have some non-cash items at your disposal, such as share options to “pay” staff part or all their wage or bonus. This route needs serious consideration before you go down it, not least because it means you are giving away part of your business. Seeking tax advice here is also important.
If your company does well, the value of the share options will rise. This makes getting share options an attractive prospect for an employee – they have a stake in the business now and will share in your success. If you decide to give shares to employees, you have to assess how much each share is worth now and could be worth in the future, to judge how many shares should be awarded to each individual.
However, you can’t pay your rent or the bills with share options, so shares are never a substitute for a salary. Your staff still need cold hard cash to live off, and if you don’t provide it, they’ll move to a business that can.
As a method of motivating and rewarding great members of staff though, and keeping them in the business for the long term, shares can be a powerful incentive.
If your business does really well and you find yourself in a situation where you need further cash to fund the next stage of your growth, you have two main options – debt or equity.
Bank loans – a lump sum paid to you now by the bank in exchange for regular repayments paid back over time. If you need a sum for a fixed or long period of time, a bank loan is worth considering. If you are predicting a small, short term cash hole, a more flexible option (eg an overdraft) may be more appropriate. Banks often demand a guarantee, such as a charge over your assets, and may require certain financial metrics to be met (covenants), such as revenue, profit or cash levels.
Overdrafts – useful if you need to borrow money from the bank for short periods of time that you can then pay back. Overdrafts tend to be an expensive form of borrowing, with higher interest rates that fixed term debt.
Invoice discounting – say you sent an invoice to a supermarket which will not be paid for 90 days under their payment terms. You can approach the bank to borrow money against this future income from the supermarket. This is invoice discounting, and it has become fairly common over the last 10 years. It is a relatively cheap and flexible form of financing that increases and reduces in line with your sales.
Some supermarkets offer their own discounting service, which results in you receiving your cash earlier but costs you a few % of the overall invoice value. Again, this is a flexible option, especially when you can manage the cash drawdowns yourself through an online portal. It removes the bank and ‘debt’ element from the equation, but the discount cost is still a cash hit to you and a reduction in profit. Beware: this can be more expensive than the bank invoice discounting option.
All borrowings need to be paid back. For a business starting up, or growing fast, the cash demanded for the repayments may be as scarce as it was when the loan was originally taken out. Make sure that you plan for all repayments and build them into your cash flow model. Don’t assume that you can always borrow more to repay the original debt. Many businesses went bust in the 2008/9 crash on that assumption.
If you don’t make a repayment when it falls due, the bank can normally recall all the money it has lent you. This may well cause your business to fail. If you are finding yourself in difficulty over repaying a loan, it is best to talk to the bank and try to establish a new repayment plan. Working with them, showing them your pipeline, expected income and how strong your business is will get you a far better result than simply defaulting on a repayment in silence.
Equity involves receiving a cash payment from an investor in exchange for a proportion of the business. This is often the route taken by growing companies in early funding rounds, to give them cash to expand.
You do not need to make any cash repayments to that investor until you decide to pay dividends or sell the business. This makes it a safer and more flexible form of investment compared with debt, but you are giving away some of your business. In general, the larger the stake held by the equity investor, the more say they want in how you run your business. This means your personal relationship with your investor can be as important as their cash.
Bringing all these options together
When you have a certain amount of cash and therefore budget, how do you work out what you can and can’t do? We recommend that you build a model to work through each of the options that you in cash (and profit) terms.
Ideally, your model will allow you to input different scenarios, so you can compare, say, how 30 day and 60 day invoice terms affect your cash levels. Playing around with the options will allow you to understand the different dynamics involved in each option or combination of options and also what cash requirement you have, by week, month and year.
This will take some thinking time and some excel crunching. If you are not able to do the model building yourself, ask someone to help you. It is essential for you to understand the model’s outputs, even if someone else crunches the numbers for you. You absolutely should understand this level of detail of your business drivers – don’t delegate this vital thinking.
Once you have a set of options modelled out, find your harshest critic. Get them to review the models and assumptions that you have used and try to pull holes in them. You are trying to find all the mistakes or weak assumptions while the plan is still on paper.
It is far better, quicker and cheaper to find the mistakes on paper and correct them, than to build the solution and then find the problems afterwards.
The surprises kill you
You need to keep your profit and cashflow forecasts up to date, and looking ahead at least three months, preferably more depending on your business. This should give you advance warning of future problems. e.g. when you might run out of cash. By knowing in advance, you give yourself time to plan alternative options or get funding.
Models need regular updating and revision, because your business is going to be constantly changing as it grows. Just winning one new customer, with a different Route to Market or different set of payment terms, has the potential to blow a hole in your cash. You need to make decisions with your (critical) eyes open, and this is best done with fresh, updated models.
Planning is your friend! Planning reduces surprises. It is the surprises that will kill your business.
Summary of the Cash Strategist Series
A quick recap of the cash impact of the business options we looked at throughout this series:
If you’re choosing between two or three facilities, you will look at price: how much they are charging you per unit. This is a key factor, but price should not be viewed in isolation.
- Model out your options in terms of cash and profit.
- Spot as many mistakes on paper before turning into reality. It is a lot cheaper and quicker to resolve at the paper stage.
- Planning is your friend! Do it, even if you find it really, really boring. Life won’t be boring if you run out of cash, but we don’t recommend risking that experience.
X Cash is paid out now
√ Expected cash benefits later (sometimes much later)
- No guarantee of any payback
- Plan out how much you can afford to spend and over what time period
X Cash is paid out now
√ Expected cash benefits follow from increased sales
- No guarantee the marketing campaign will be successful
- Experiment to find out what marketing options work best for your business
√ Cash is received from consumers in advance, which is great
√ Relatively low upfront spend to set up website
- You need to spend on marketing to drive customers to your website
- Lower risk model
√ Cash is received from consumers at point of sale, good for cashflow
X Large upfront cash payments needed to rent and fit out the store
- Regular cash outflows (rent, rates, payroll for store staff)
- Higher risk model
X Cash payments from customers several months after sale – bad for cashflow
X A lower sales price as the retailer takes a cut of the profit margin
- Cash spend on marketing highly likely, to support your rate of sale and keep your listing. Delisting is a very real risk.
X Large cash payments upfront to get facility and fit out with equipment before you can start production
X Staff recruitment & training costs prior to production
- Ongoing salary costs every week/month
- May or may not get a better cost price per unit vs outsourcing
- Management time involved in managing facility
- Harder to scale capacity
- Higher risk model
√ Lower upfront costs – pay as you go
√ Can pay production company after a month or two. Good to help fund growth
- Less control of production, quality, IP, and other factors
- Outsourcing may not be available for your product
- Stock = trapped cash. Aim is to keep to a minimum
- Understand your likely sales (sales forecast) and plan stock according
- Watch the shelf life – wastage is money down the drain
- Need to pay every month on time every time
- If you use debt, plan to ensure that you can make all the repayments you need to
- Equity is less risky during the early stage and growth stages of your business
Building a business is hard work, but also very rewarding. Enjoy your journey.