And, without fail, people always come back to me with the wrong answer! They call out ‘sales’ or ‘turnover’ or ‘profit’ but they hardly ever mention the right and probably only answer and that is ‘cash’.
The reality is that it may be illegal to trade without profit but it is impossible to trade without cash.
So how do you keep your head above water? It isn’t rocket science, but very few people seem to follow the basic steps.
1. Measure cash-flow like a hawk – it is your business so it is your responsibility to know exactly how much you owe, how much you are owed, how much you have got and how much you are going to need. Do the numbers.
2. Do the cash-flow projections – depending on how close you are sailing to the wind and how big the fluctuations are, do cash-flow projections every quarter/month/week. Failure to do so is entirely inexcusable.
3. Have clear credit terms on your initial contract and on all subsequent invoices.
4. Check all new clients’ credit records – and watch them until they have proved themselves to be reliable.
5. Have a rigorous process for invoicing, following-up and collection. Be reasonable but be firm. Talk to anyone who owes you money. Listen. Be clear and be firm. It is your money that they owe you.
Also recognise that a tightly-run credit control system is useless if you are not making the profit in the first place.
As Michael Porter says, “Cutting prices is usually insanity if the competition can go as low as you can”.