According to a study by Santander Corporate & Commercial, almost one in six small businesses in the UK are “very” concerned about managing cash flow effectively over the next £12 months, with a further £27 per cent”feeling?”quite” concerned.
Some 46?per cent of businesses report being hit by at least one recent cash flow setback with late or failed payments from customers (24 per cent), weak sales (eight per cent) and unexpected costs and charges (seven per cent) being the top three reasons for cash flow issues.
There is a widespread awareness of the immense effort required to own and manage a small business. Cash and cash flow should and will always take precedence for smallcompany owners.
However, there is one area which could help?bosses manage their cash effectively?” the assets of a small business. Assets have a direct (but not easily recognisable) impact on cash and cash flow.
Sales growth can sometimes impact cash flow
Herbert Woodward, in his article Management Strategies for Small Companies on Harvard Business Review, suggests small businesses have a strong focus on revenue recognition via sales growth.
Whilst sales growth is commonly seen as the solution to all problems, there is less awareness that, except in the short run, there is no such thing as a fixed overhead.
Small firms quite often rely on the concept of marginal income accounting, bring out additional products or focus on geographical expansion, believing that overhead will not be affected.
The gap (in recognising revenue via sales growth) ensures sometimes cost of sales don’t scale linearly; sometimes the cost of sales can be exponential, especially for small-scale businesses selling physical assets. Regional expansion and the sales resources required for additional sales quite often require new and fixed investment.
Revenue growth is best targeted after getting a deeper view of sales volume by product/service, profitability by product line or region, and gross margins for different product lines.
For example, if you are based in York and provide hydraulic components in the North East and North West, if you plan to grow your business in the South East (from York) then travel, sales and shipping costs will be higher. As a result, your cost of sales for the South East will be greater compared to your cost of sales for the North West and North East.
Often the cost of sales is linear at scale but at the growth stage, it tends to be exponential.
Read on to unlock two cash flow opportunities
Optimise or eliminate ghost assets
Ghost assets are those that you bought but are now missing or unusable. A recent survey suggested 74?per cent of bosses are unaware of the ghost assets in their organisation. The direct impact on cash flow here is you will be paying tax, insurance and maintenance costs for assets that are missing/unusable.
Typically, three to £12?per cent of your assets are of the ghost variety. They can be IT assets like computers, hardware and software, or operational?ones spanningequipment, machinery and tools.
For small businesses who tend to manage assets in spreadsheets, ghost assets are likely to be ten per cent of your total assets. For example, if your yearly (asset) tax, insurance and maintenance costs are £50,000, then you have the opportunity to save (up to) £5,000.
Small businesses can take a two-pronged approach here (1) To identify current ghost assets and calibrate tax, insurance and maintenance costs and (2) To work on a short- to medium-term solution to reduce the overall number of ghost assets.
Asset audits can aid small businesses in identifying ghost assets. Audits can be internal or external.
An asset audit by an external agency is a good starting point since’such firms do not have the knowledge or know the history of your assets, and are thus able to identify the gaps in your asset register more effectively. A combined approach?” a yearly asset audit and a six-monthly audit by internal employees?” is an optimal way to reduce your ghost assets.
Extend asset?life by maintenance and value appreciation
Some 41?per cent of small businesses take a reactive maintenance approach. “Don?t fix it if it isn’t broken”?means you are waiting too long to fix the problem. This also means it is expensive to fix the problem.
Asset maintenance requires a combination of a reactive and proactive maintenance approach. Whilst reactive maintenance does not require planning and is failure-dependent, this means you do not have maintenance contracts, which can save your monthly outgoings. However, the down side is asset failures can be sudden and fixing them can be expensive.
The overall asset down-time is generally higher than proactive maintenance. With proactive maintenance, your long-term maintenance costs are low and it influences the overall health of your assets.
The impact of asset downtime on your bottom line should decide the type of maintenance approach you adopt. Critical assets can be proactively managed whereas standard assets can be maintained reactively.
Maintenance strategies can increase asset life by four to 13?per cent,which means you have the opportunity to impact your expense (to replace ageing assets). For example, if your total asset cost is £500,000 and if you can increase its life by just 4%, you will influence your expenses and your cash flow by £20,000.
It is totally understandable how small businesses overlook indirect cash and cash flow opportunities. Quite often they are resource-constrained and only focus on immediate priorities.
Prasanna Kulkarniis founder and product architect of Comparesoft Ltd
Cash flow is one of the hot topics discussed at the FD Surgery Manchester in November. Find out more here.
