As Jim sat back and relaxed in his steaming hot bath tub he pondered the events of the past month. He owned a successful small business with a £3 million per year turnover but financially things weren’t going smoothly.
His thoughts had reached the point where he was forced to delay paying a key supplier until some money came in. As he replayed this embarrassing moment in his mind, he felt the warmth creep up the back of his neck and his face flushed bright red as the feelings returned….
Suddenly he became aware that parts of his anatomy were actually getting cold, and as he glanced down he noticed the level of water had gone down significantly. He frantically searched for the plug and sure enough it had become dislodged. He swiftly refitted the plug into it’s hole and refilled the bath with hot water. Thinking all was well again he leaned back to continue his review. However he was still haemorrhaging water at an alarming rate. The water quickly subsided, and it wasn’t long before he was left high and dry. The cause of the problem became obvious when he inspected the plug at close quarters, it had actually split.
Fortunately he had a replacement plug, however he had run off all the hot water from the tank and became quite irritated at the turn of events.
After waiting for an hour or so, the hot water system was able to provide enough for him to return to his contemplative soak, when he had a real ‘Eureka’ moment.
The bath tub experience was virtually the same as the cash-flow problem back at work. The order book (water supply) was good and the prices, whilst competitive yielded decent profit margins. Despite this they seemed to have these critical moments when they didn’t have enough money to buy the things the business needed to operate (the hot water ran out) . The most annoying aspect was the surprise nature of these occasions (leaks) and the fact no-one else seemed to worry or be really concerned.
This helped Jim to formulate a way of explaining to people how cash flow works and how to monitor it so problems were flagged up earlier. You see there were a lot of very conscientious people in his organisation but they just didn’t see the importance of cash flow as the order book seemed very healthy and customers were quite happy….
At his next management meeting Jim drew a large bath tub on a flip chart and a wavy line that represented the water level. He wrote the figure £150,000 on the bath tub.
“Now” he started “Who recognises the number on the bath tub?”
Silence…… Jim revealed: “It’s the bank balance at the beginning of last month. Looks quite healthy doesn’t it?” Heads nodded in agreement.
Jim continued: “Let’s say the amount of water in the bath tub represents that bank balance. Now, what happened through last month financially, day by day?”
Linda the sales manager provided sales figures for each day.
Again Jim added: “All looking good so far? Anyone any questions?”
Silence. “So you might be wondering why the bath tub is not overflowing now” continued Jim. “Fact is, we haven’t actually put any water in yet, all we have done is requested some, no-one has actually turned the tap on yet!
“Linda” asks Jim “What terms did we give our customers the previous month?”
Slightly flustered, Linda replies: “Well, we offered additional discounts to beat off our competitors and increased our payment terms to a couple of big customers who twisted our arms, but they did promise to purchase additional quantities”
“So, we have effectively slowed down the flow of water into our bath tub even before the tap is turned on” says Jim.
Jim then turned to his purchasing manager: “Richard, what significant purchases did we make last month across all the accounts”
“I had a feeling you might raise this Jim so I have done an analysis”replied Richard.
Richard then summarised the day to day expenditure, and as he did so Jim re drew the level of the water in the bath tub and the new financial number each time.
When Richard was about half way through the month, he reported an outgoing of £75,000 on staff salaries which drew a gasp from the audience as the bath tub only had £50,0000 left!!!!
“In some ways we have now caused our bath to leak” said Jim.“Joking aside though, this was a serious problem, does anyone have any idea what I had to do to plug the leak?”
Once again, silence.
“Well, firstly I had to swiftly arrange an overdraft increase, at a premium cost, and that will eat into our profits. Another option was not to pay people this month!” said Jim.
Jim continued: “Apart from the loan, I had to hold off paying for some raw materials from our most important supplier. That was an uncomfortable decision, but we just didn’t have the money to pay them, the bath tub was empty….. So, despite the healthy order book, we were close to going out of business!”
Jim then summarised: “We need to bear in mind this idea of a bath tub and controlling our cash flow. We should know when the tap is on or off and when money is actually coming in. We also know when we are leaking money and when our expenditure is, so we should be able to keep an eye on the water level continuously and foresee our cash position well in advance and not allow the tub to run dry”
The HR Manager Lisa then added: “I have heard TIPS for Good Management are running an excellent 1 hour LIVE on-line session on Wednesday September 16th 2015 at 9am, 1pm and again at 3:30pm called ‘Control Your Cash-Flow’ with a FREE control sheet to help us plan our cash more effectively. They come highly recommended and if you book early it is only £9:99 per person”
Jim quickly endorsed the training, his people will be attending will you? Places are limited so book now.
If you are a small or medium sized business and want a sure fire way of controlling cash, this will be the best hour you will ever spend on the subject. We are including a free downloadable control spreadsheet (approved by a national high street bank) which enables you to start planning your cash flow management immediately.
Please follow the link below to register or contact us for further information.