Can having too much cash kill a business?

Shane Cann, an associate at Bush & Co Limited in Exeter, Devon, is an accountant and tax advisor has spent his career working with small to medium sized businesses. Having owned and operated a restaurant in Dawlish Warren, Devon, for three years with his wife, he is a specialist in advising businesses in the leisure & tourism businesses with a particular penchant for the hospitality sector. Shane’s business experience involved setting up a business from scratch, employing a team of fifteen, dealing with suppliers and of course he works in the kitchen when he can.

We’ve all heard the phase, “Cash flow is king”. Unfortunately business is becoming awash with clichés. What does the above really mean? Should cash flow take precedence over everything else?

Recently a client of Bush & Co Limited was unfortunately involved in a business where the downfall was likely to be too much cash. I don’t act for that business so can’t guarantee that to be the case however from my experience, having too much cash catches more businesses out then you would imagine.

An indication, of too much cash being a problem is that when a tax bill or supplier payment is even bigger than you were expecting. Why is this an indication?

An excellent example is a hotel, imagine being paid a deposit a month before the guest arrives, the guest then arrives and pays for all of their food and drink either in cash at the time of consumption or pays for it at the end of their stay. Worst case scenario, the hotel is paid all of what is owed by the end of the stay (maybe the end of a week’s stay). The hotel meanwhile pays wages weekly in arrears and pays its suppliers the end of the month following the invoice month. Of course the payment that catches most is the VAT, this is paid possibly up to 3 months’ time.

The cash time line would look like this (imagine a series of customers for this example):

Amount Balance
Day 0 Customer pays deposit £2,400 £2,400
Day 30 Customer arrives - £2,400
Day 37 Customer pays £8,600 £12,000
Day 44 Staff paid (£4,000) £8,000
Day 60 Suppliers paid (£6,500) £1,500
Day 90 VAT element paid (£2,000) (£500)

This example shows how a business who has had a positive bank balance for 89 days has actually made become overdrawn as following the VAT payment. It is also most likely that this business would have made an accounting loss on this example.

This highlights how a business can become complacent by having a healthy bank balance. This is a common problem for businesses in the hospitality industry.

Normally a business such as a hotel, restaurant or pub will take cash or card payment on making their sales. The business will normally have a much longer credit period from their suppliers therefore they just have to open their doors and their generating cash unless they are very unlikely.

Most business owners judge their businesses performance by the cash position, this is not a bad idea in itself. However if you don’t start really thinking about the total amount that the business owes then this very dangerous.

The solution to this problem is not actually difficult. It’s simply to have an update to date management information system. Sounds fancy but it just means having your bookkeeping up to date and running regular management reports to show the performance of the business.

To do this you need a few things:

  • Accounting software
  • Invoices (purchase and sales)
  • Either time to process the invoices or a bookkeeper

The accounting software has for the recent years only ever been Sage or Quickbooks however with cloud accounting really taking hold, there is an opportunity to really make a personal decision. Offerings such as Xero, Liberty or Quickbooks online are very popular as they can reduce data input time and do look easier to use than Sage, or at least I am told so by clients.

The invoices should not be a problem, any system whereby all invoices which haven’t been processed are kept together should suffice.

The time to do the work or a bookkeeper is slightly more difficult. Some people choose to get involved in this from day one as it allows them to really get a feeling for the incomings and outgoings of their business. This is a great advantage however the time involved to learn how to do this effectively and to actually input the data can be restrictive. In which case you need a bookkeeper to do this for you. In the brave new world of cloud accounting, this doesn’t actually need to be a traditional bookkeeper, it can be a service like Receipt Bank, where you send all your docs to be processed by someone else or increasing accountants are able to offer a more cost effective solution as travel time is removed.

Summary

In order to ensure that you are sure of your business’s performance, you need to go beyond just the cash position. Regular management accounts are needed as they go beyond the bank balance.

10 Tips for Avoiding Cash Killing Your Business

  1. If you’re using the bank balance as a gauge of your business’s performance then deduct all outstanding costs.
  2. Use regularly management accounts.
  3. Make the bookkeeping easy by using easy to understand software.
  4. Get into the habit of getting the management accounts prepared frequently.
  5. Plot out the upcoming supplier and tax payments to ensure that cash outflows are not a surprise.
  6. Don’t ever think “I’ve got loads in the bank, the payments will easily be less than the balance”.
  7. Consider involving management or an accountant in the management accounts process to improve your accountability by having someone else in the process.
  8. Remember, more cash equals more sales which means more cost of sales and unfortunately more VAT.
  9. Try to consider the impact of not knowing how the business is performing.
  10. Make a management accounting solution work for you.

To contact Shane, please ring 01392 432525 or by email shane.cann@bushaccountants.co.uk

Image courtesy of https://www.flickr.com/photos/howardlake/

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