10 May, 2012
Jamie Constables’s Key Tips For Business Success
As a specialist in refinancing and restructuring companies that are in financial distress, I am acutely aware that the majority of business in trouble will wait until it is too late ask for help. Entrepreneurs often set up a business on a shoestring because they don’t have much cash to start with.
They aim to grow as fast as possible without realising that the more their business grows, the more cash they will need to put into it. For most business owners it comes as a surprise that larger contracts and high turnover are not in themselves a route to success.
In our experience at RCapital there are three key areas of weakness among business owners: a lack of understanding of the meaning of cash flow management; a tendency towards over trading; a reluctance to ask for advice from those who have had practical business experience – until it’s too late.
With this in mind here are my key tips for a successful business:
Ask For advice at an early stage
There are huge benefits in seeking expert advice before embarking on any kind of financial venture. Fortunately, it is now much easier to find business mentors from all walks of life who have been there, done it and have grey hairs to show for it.
Why wouldn’t you want to learn from others’ mistakes? If you can find out in a few weeks or months what it has taken a successful businessperson 10 or 20 years to learn the hard way, you would start out with a huge advantage.
Understand the difference between ‘cash positive’ and ‘cash negative’
Lots of people set up in business without knowing the difference between cash positive and cash negative business, yet it is possibly the most important thing to understand. Remaining cash positive is the key to business survival and longevity.
In simple terms, it means there is always more money coming into the business tham going out at any time.
For example: If you go to a restaurant and buy a meal, the company won’t pay for the food on your plate for 60 days. You will have eaten it before it has paid its supplier. (The suppliers will have similar terms with their suppliers.)
This is sound business practice and provided the cash flow is properly managed, this model has the potential to maintain a cash positive business.
In contrast, the cashflow model for a retail business that is, for example importing clothes from the Far East and then selling them in its own shop, will be quite different. The retailer will have to pay its overseas supplier in advance in order for the stock to be released for shipping.
It may then take as long as two months for the goods to arrive, clear customs, and be put on sale. There may be import duty to pay. It could take a further two or three months to sell those goods. By the time the customer pays the retailer, the business may have been carrying all of those costs for five months or more.
The danger is the more stock is bought the more cash negative the business will become and the more the owner may need to borrow – and – so it continues – until the business falls over. Therefore , understanding the difference between cash positive and cash negative it vital.
Avoid over trading
At RCapital we repeatedly find the mai reason businesses fall over is because they overtrade. As an entrepreneur you might think, how can I be overtrading? The contracts are in place, the turnover is increasing, our product is in demand. Surely we are doing well?
Overtrading results when cash is going out of the business more quickly than it is coming in. If you maintain cash positive business, you can’t overtrade.
So the main advice we always offer to entrepreneurs who are looking at a new or existing business, is to think about how the business will be financed and how they will manage their cash flow. A cash positive business can never be a victim of over-trading. It is such a key lesson to learn.
More businesses could be saved from financial disaster if business owners sought advice early enough. The answer is not always an injection of capital from an investor. Sometimes it is enough to renegotiate terms of business, or to look at restructuring.
But the best piece of advice I can offer is to always seek expert advice as soon as you suspect your business is in trouble. Waiting until you have no other option is likely to lead to the least profitable outcome.