Lost leaders by such an amount may be feasible as a one-off to maintain capability between jobs (ie, when you have profitable work lined up but is a month or so away but you want to retain staff), but to do so in the hope of getting further work is basically gambling and the start of a slippery slope.
Once you start paying losses from future profits yet to be earned, it is a recipe for disaster, and you have to look at your business model very carefully if you want to stay afloat.
Cash is King during such difficult times (mind you, when is it not?) and while I have written on this before I think it is timely to do so again.
Often you may not get fully paid for some time after you have completed the work, or not withstanding you may require payment within seven days, it is delayed for some reason.
But of course you still have to pay your bills. Cash flow management is about making sure there is enough money to pay the bills even if you haven’t been paid yet.
Do you ever fall into or exceed your overdraft by mistake and have to hastily talk with your bank manager? If the answer is yes then you have a problem. Even if you are trading profitably you can have cash flow problems.
So how do you stay out of cash flow trouble?
• Don’t neglect the books: Make sure your accounts are accurate and up-to-date. That will help you see cash flow problems coming before it’s too late. I know many find bookkeeping a chore and don’t think it’s a productive side of the business and would rather be out there drumming up new work. But they run the risk of being forced to close because they can’t meet their debts.
If the books are done regularly, and you pay attention to what they’re telling you about your business, you will not only be in a better position to manage cash flow, you will also have a better understanding of what makes your business profitable and where your expenses are mounting up.
Even if someone else does the books take a detailed interest in what they show.
Plan ahead: By using a cash flow forecast you will know in advance whether there’s going to be enough money in the bank to pay your bills. January and February are always quiet months in construction so you need to keep money back to pay those overheads during the Christmas down time.
By planning ahead you can put money aside (or make borrowing arrangements) well in advance to meet your commitments.
• What if you get into cash flow trouble? If you find you are getting into cash flow trouble there are several things you can do:
• Tighten your debt collection efforts to bring cash in more quickly.
• Avoid drawing funds for private use during difficult periods.
• Consider the release of stock/staff/equipment/premises to generate cash or reduce overheads.
• Negotiate an overdraft facility with your bank but avoid staying at the peak limit for long periods. Using outside credit may help, but borrowing is best used to help your business achieve its long-term goals rather than as working capital.
• If you need bank help do it early. The more you anticipate a cash flow crunch and make suitable plans, the more your lenders will respect your business skills (rather than rushing in in the midst of a crisis). If you seek help early, you’re also buying time to find other sources of support if the bank doesn’t help.
• If a cash crisis occurs despite your best efforts, inform your bank and creditors before payments are due. In the case of creditors you may be able to make arrangements and progress payments that demonstrate your good faith and intentions to settle your debts.
Get professional advice. Don’t let a lack of cash or poor profitability stop you from getting the help you need.
• Control your cash: If your business is always short of cash, examine your cash handling procedures. Some cash flow crises are caused by embezzled funds. It’s not enough to just sign the cheques yourself.
Mistakes or fraud can occur when people are ordering goods or handling cash that’s come into the business or preparing cheques for you to sign.
It’s a good idea to involve two people in each transaction so there’s a cross-check — eg, one person checking invoices that come in, with the other preparing the cheques or payment slips. Or one person could open envelopes and date stamp the contents, and the other check the money side.
And if you have to be away from the business have at least two employees sign cheques.
Hopefully some of the suggestions above can help you keep on top of the ebbs and flows that your business will always experience.
Once you have a good handle on this, it will become routine and be a lot easier for you to identify when things might be slipping out of balance, and to give yourself ample opportunity to put things right.