Money Talk: Business health is still all about the cash flow

It started as so many of these contacts do a call from someone who had originally spoken to us about his prospective business nearly a year earlier, but then had gone quiet. This call was slightly awkward for him he’d taken up a friend’s offer to ’look after’ his accounting and was now a little desperate.

He said he’d been open more than four months and been very busy, but having cash in the bank for staff salaries was a close-run thing each month. "What’s gone wrong?" he asked. Resisting any temptation to mention his earlier choice of advisor, we asked whether he had any figures to share with us. "Of course," he said, and emailed some numbers. Unfortunately those numbers were just figures for an attempted VAT return; sales and total purchases nothing resembling a set of accounts. It was going to be a long conversation.

Cash sales

Our contact was actually an optician. He had a very detailed business plan drawn up long before he set foot in his practice. So at least we could try to compare some of his available figures with what had been predicted in that business plan. His ’sales’ seemed even better than in the plan but wait a minute. The forecast sales had been expected to be cash (or nearly cash debit card or credit card) transactions, whereas his actual sales involved much more NHS work, which takes at least a month to translate into cash in the bank. Then there was the VAT issue.

Now we won’t get into the subject of opticians’ VAT here other than to say that if anyone in petrol retail thinks that VAT is difficult (all that hot food, news, 5% stuff etc), they really should have that conversation with an optician some time.

His business plan assumed that he’d receive some £35k in VAT refunds for the start-up costs of the business in month four of trading; because, of course, you submit a quarterly return at the end of three months and receive the refund next month, don’t you?

Actually no. Even in better times, submitting a VAT return with a large refund due to your business meant there was a good chance of the repayment being delayed for a few weeks, while HMRC determined how you’d arrived at the idea that they owed you money.

More recent experience with all sorts of retail and franchise businesses suggests that almost any VAT return involving a refund but particularly with new start-ups can now result in protracted and detailed enquiries from HMRC before the repayment is approved. They may want to visit your business premises just to confirm that you are a real business; they’ll ask to see your calculations, and request copies of a wide selection of your suppliers’ invoices. Even if everything is okay, the process can take weeks; realistically you could be looking at two months. So if you expect a sizeable VAT refund for any reason, it’s not going to hit your bank account a month after the quarter end, regardless of how early you get that return in.

The point of this story is that in any business, while sales are obviously essential, cash flow is critical. When it comes to forecourt retailers most transactions aren’t ’cash’ sales in the sense of notes and coins: more likely they’ll be either a retail card (debit/credit) or a fleet card. In these days when so many of us do personal banking online and can arrange ’same-day’ transfers of funds from one account to another, it comes as a shock to some new operators that it still takes at least a couple of working days for a debit card transaction to appear in their bank account: "That’s so 20th century," as one young petrol retailer put it recently. And that was before we started talking about his fleet card sales. Yes, you’ll be waiting for around three weeks to get those paid, which is barely quicker than in the pre-EFT days of manual paper vouchers in the 1980s.

Payment technology has progressed since then, but it’s not always the retailer who’s seeingthe benefit.

Pro-forma invoices

Meanwhile, at the other end of the cash equation, suppliers don’t hang around waiting for you to pay them. Start a new business and many suppliers will insist on ’pro-forma invoices’ ie a cheque with your order before they agree to send you anything. In itself this can cause some problems with VAT refunds, but just as importantly many business plans tend to ignore the problem and assume that all purchases will still be on ’credit’ usually 30 days.

Unfortunately there are now few shop suppliers in any line of business who offer traditional ’monthly’ terms. Weekly direct debit is much more likely, although if you’re very lucky and have a good previous trading history with a particular supplier, they might just extend that to two-weekly payments.

If you’re a dealer looking at fuel supply terms, the norm is DD three working days after delivery; a handful of suppliers may offer something better but it’ll take a lot of hard bargaining and almost certainly the need to offer them some form of security before they agree. The argument has always been that fuel turns over rapidly: a dealer only needs to keep three to four days’ supply underground at any time, and should have sold out each tanker before the DD is taken from their bank account.

This sounds reasonable, although the vagaries of individual sites’ tank and pump installations often necessitate far from optimal stockholding levels, and that’s before any issues arising from particular ordering or delivery arrangements. And, of course, without accounting for the two or three weeks ’credit’ that the dealer effectively gives to fleet card customers with or without the full retail margin on each litre sold!

Balancing cash flow can be difficult, but it’s absolutely vital for the health of any business.

You can’t do it properly without information, so get professional help and advice as soon as you need it don’t wait until your cash disappears.