by Lionesses of Africa Operations Department
London, February 2020 and a few days before, Melanie had just given her closing speech at our ‘Start-Up Night Africa - London evening at the UK/Africa Summit (said to have been the best event at the summit by the well respected Chatham House - no surprise to us. As usual, Melanie had brought together an incredible group of inspirational Lionesses to showcase to the UK Government and their closest 400 friends from the business and finance world), and together as a team we had started to notice a strange lack of handshakes taking over our follow-up meetings. We had even been introduced to the by now familiar ‘elbow-bump’ in one international bank’s boardroom, but by then all knew of the shock, speed and horror with which Covid was racing across Italy and rushing fast to all international airports and capital cities.
Rather subdued, we headed back to our desks in various parts of the world, and recognizing what was happening we knew we had to warn as many within Africa as quickly as possible and so started our ‘Business Unusual’ articles on Operations and Finance. We opened with our article: “Coronavirus is hitting the Northern Hemisphere hard and will come to Africa and a city near you soon. Sadly, this is a fact…As a business owner, you have time to put your own emergency measures in place now, and that starts with ensuring your company survives the economic fall-out from this global pandemic.”
If the world was going to come to a shuddering stop, what did that mean for our Lionesses? What was the very first issue they had to think about? What is that quickest killer of businesses? Lack of profits? No. Losses? No. It is a lack of Liquidity, this fluid, this water of life for your business - and that is why knowledge and control of your Cash Flow is so essential. It was Cash Flow that we yelled hard and loud to our membership in that first article.
Three years, many articles, and a shocked appreciation of how Melanie has pumped out at least two thought provoking and inspirational articles each and everyday since 2014 (whilst we get stuck on one a week!) —later, and guess what? Cash Flow is still as important as it has ever been. Indeed, if one puts aside the dark days of Covid, at this moment in time, having moved suddenly from a low interest rate environment to a high; with inflation rearing its ugly head; with foreign investment into Africa drying up; with the war in Ukraine stopping essential foods reaching our shores; and countries such as India putting bans on exporting rice, Cash Flow is probably at its most stretched it has been for many a lifetime.
If you are an SME, then Cash Flow plays an even greater part of your daily lives. Your Cash Flow to Assets ratio is much higher (by multiples) than for larger firms (see page 75 here). Huge celebrations at winning that large tender or deal are suddenly countered by the sick feeling rising in the stomach - where will you get the deposit to pay your manufacturer and cash for the ex-works balance? As an SME, single orders and especially large ones have a huge impact on your Cash Flow. The smaller you are, the more you rely on Cash Flow - you are eating hand to mouth.
So where are the areas we must keep tight to ensure that liquidity, that water that keeps our businesses alive, keeps flowing?
1. Your warehouse.
Take a walk around that and look at all those wonderful products. SCREEECH! NO! Take a walk around your warehouse and look at all that Cash gathering dust!
Cash Flow is all about the speed at which you move your cash through these bottle necks. You want a fast moving warehouse, turning quickly (with very few dark corners where those hard-to-sell, just-in-case items lurk), and your Sales Team want the opposite - a full warehouse, to make their lives easy. “Yes sir, pink with purple spots is it? - of course we have it….”. Ching-Ching goes their commission pot. Your Sales will love you for this.
Somewhere in the middle (and it will ebb and flow as you fine-tune your operation) is the perfect spot - after all, you too want some stock for when a customer calls, however, you must keep control. Your sales team will not thank you if you allow them to have whatever product they need just to gain their love if your company then goes bust! That certainly won’t gain their respect. Just like a child, where boundaries are set show the love, and a child being a child constantly tests these (certainly our children!), so too your Sales Team. Blink and they will be off like a slippery Fish through the net, ordering more stock ‘just-in-case’ and any respect and understanding of how you are building your business will be lost.
Where else do we find bottlenecks that need to be cleared. Yes, don’t you just know it?
2. Your wonderful debtors’ book.
We had a conversation recently with one businesswoman who said that her worst payers were actually her friends! All very wealthy, they just had no idea or perhaps care how tough it was to actually run a business. To make matters worse, when they finally paid it was almost begrudgingly or with comments - “You knew I was good for it, why the pressure?!”. Seriously, if we can ask one thing from anyone reading this who runs a large business or Government dept (very poor at paying SMEs) or has a ‘tab’ at the local coffee shop. Pay Up, Pay Early and Pay Fair.…show the love and gain respect.
For friends and for other debtors on your books. When you have goods to deliver is when you have the power. That is when you can insist on paying off the old invoices, or reducing to the supposed limit that had previously been agreed.
What is it with Credit and Terms? A decent customer of yours asks for credit and terms and immediately given these ‘upper limits’ (say 60 days and $10k), assume these are their ‘lower limits’, the new normal. Suddenly they are 98 days and running and at $17,500…
You have some difficult choices to make.
Do you need them as a customer?
If yes, then when they next have a delivery you have to be firm and insist on payment before delivery.
If no, when next they have a delivery, you have to be firmer.
If necessary sit with them and arrange a payment plan, collect post-dated cheques if possible. and then if the cheque bounces you can tell them that each day you will re-present these and again (this creates large fees from the bank and larger issues for the customer going forward, so it will concentrate their mind, believe us).
Some customers do learn and then they can come off the ‘naughty step’, but there are others who will never learn and are just so exhausting. Just like our Sales Team in our warehouse above with boundaries set which does gain the respect (believe us, it will), so too with your customers on your debtors’ list, you will gain the respect as your customers recognize you are running a tight ship, one they would be happy to have as a supplier. Interestingly it is rare for warnings from Sales Staff that ‘we shall lose the client’ actually come true, and if it does - is it not a ‘win win’ that they will now be going round to your competition and blocking their Cash Flow? If you are firm, firm again, and then slip for a moment, you will have undone all the great work and they are off once more like a slippery Fish (much like our children!).
Listen to what is going on in the market. If they are late on paying salaries, then you are going to start having problems with this customer - this is a sign they have a Cash Flow problem that they will make your Cash Flow problem. In all cases search for their last published audited figures. Although they will probably be a few years old if a private company, quite often you can get a glimpse of their ‘under-belly’, their accounting ratios. Current Ratio (current debts/liabilities), sub 2.0 is not good - shows they have difficulty paying debts. Quick Ratio (Assets/Liabilities) sub 1.0 is not good, their liabilities are larger than their assets - you will sadly see what this really means when they go bankrupt.
One tip: all companies above a certain size with Cash Flow issues will most probably have a special list of those suppliers they pay on time (e.g. a hospital does not want to run out of blood, so the blood bank will be paid on time), and the rest they pay when they can. Sit with the most senior finance person you can get to, by hook or by crook - even via LinkedIn, make the connection, try as much as possible to get on this preferred list. It is worth it.
Sadly in the areas of Cash Flow, we cannot relax for a moment.
Boundaries set the love, gain the respect, produce the partnerships that work together to create the essential liquidity, the water that flows through the pipes and feeds everything including salaries, but blink and it’ll all disappear out of our hands faster than you can say (yes, you’ve guessed it…) slippery Fish.
Stay safe.