I work with a lot of food and drink companies which have problems with money. I have been a food and drink company which has had trouble with money. I have, on more than one occasion, had to scrape around using credit cards, personal savings and personal overdrafts to pay staff at the end of a month. Like many others, I too have lain awake at 3.00am wondering why I have money worries.
Overtrading is the usual cause. Too much ‘work-in-progress’, where stock is being built either for orders or a seasonal demand. Suppliers want paying, staff want paying, HMRC wants paying with PAYE and VAT, but customers don’t want to be paying because they all have the same issues. Hence a shortage of money.
What can you do?
Don’t borrow more money! Not until you have exhausted some of the other options.
Firstly, are you in charge of the money? Or is the money in charge of you? By that I mean; are you one of the people who has a bookkeeper who pops in to put the invoices on Sage and reconciles your bank statements? Do you rely on them letting you know who has and hasn’t paid, and what a great job they did putting all the new invoices on?
Personally, I think Sage is a four-letter word. But then, so is Xero. But the difference is that new account packages like QuickBooks and Xero, which generally accountants and book-keepers sneer at, are brilliant at helping you get your money. First, it puts you back in charge so long as the information is set-up correctly. Everyone can get a report, P&L, raise invoices and sort their own admin and with that engagement comes management information, driving efficiencies such as cost management and invoice chasing.
I am a marketing person and it is my firm belief that the best weapon of the marketer should be the Gross Margin. This is the simple calculation of Sales minus Cost of Sales equals Gross Margin. This is all well and good as long as you know the difference between Fixed and Variable costs and then allocate the right Variable costs to the enterprise.
If your eyes are glazing at this point, I would not worry as it is really simple but brilliant stuff to know because it puts you on a par with the ‘smart-arse’ consultant who tells you to do more of what’s working and less of what’s not, given a Gross Margin should be able to help you spot the difference.
Back to where all the money went; if you had a Gross Margin by product and / or customer it might tell you what business is worth doing and which is a bit more marginal except it depends on that fundamental. When do they pay?
I like internet sales. Why? Because it is either Money-up-front or money collected and handed over soon after the transaction, such as Amazon, Not-On-the-high street, Shopify and similar. That is, as opposed to wholesalers who both take a margin and a great deal of time to pay in some cases. Or retailers, which sometimes wake up to paying sooner but some food-service companies are little-shockers at paying.
The accounts package should be able to give you information such as ‘age-of-debt’ debtor days etc. Your accounts say profit, your bank account says overdrawn.
We all need money to service sales, so the next trick is to sort out the best source. That does not mean any source. Read how to sort the difference in part II – How Much?