Making a profit is important but before you can pay the bills, you need cash in the bank. Simon Croft explains why good financial controls are more important than ever.
There’s a good chance, if you’re running a CI business today, that you got started because you were interested in the activities of system design and installation, more than the mechanics of how the business itself runs. Innovations in AV or lighting may excite you but financial forecasts leave you a little bit cold.
At this point, you may be thinking: ‘Yeah, but I’ve been in business for xx years, so I think I’ve got the hang of it’. Welcome to the club: I’ve either been self-employed or a company director for more than 20 years. Unfortunately, a certain amount of complacency can come with that experience and it is too easy to fall into the trap of applying yesterday’s solutions to today’s situations.
Unless you are as rigorous about the running of your business as you are about the services you offer to your customers, there is a good chance that you will face a serious cash crisis sooner or later. And unless you have certain management controls in place, you may not even realise the magnitude of the problem until it is too late.
On the positive side of the coin, if you put some simple systems in place, you can very likely increase the amount of cash in your business and enhance your ability to accurately predict your future position.
Sound financial management can make your business more stable and can help it to thrive in market conditions where others cannot operate.
Hopefully, that thought is sufficient to keep your attention for the rest of this article.
Plans, forecasts and reports
How many of us have created a viable business plan – complete with detailed Profit & Loss and Cashflow forecasts for years to come – and then failed to track the actual performance of the business against the plan?
My guess is that many of these business plans have been quietly filed away as soon as the bank manager has approved a loan, and then not consulted again until the year-end. This is very bad practice and the bigger your business becomes, the more dangerous inadequate financial management becomes.
A closely related sin is to look at the forecast at regular intervals but not to update it with the actual figures. Suffice to say, in a short space of time, the ‘map’ and the ‘territory’ may look nothing like each other. In other words, the forecast continues to look rosy, even though the business is sliding down the tubes!
For this reason, it is absolutely vital that bookkeeping is kept up to date and that the forecast is updated to reflect as closely as possible the current position of the company. However, this information is only of value if it is analysed, disseminated and acted upon.
Even company directors can find it difficult to assimilate the underlying message from trial balances and the like – especially if they came on board because of technical skills that have nothing to do with the world of accountancy.
A common problem in small businesses is that bookkeeping is a secondary role for someone who is already busy. This tends to mean that bookkeeping slows up as trading increases, meaning that information about the state of the company takes ever longer to arrive. Typically Management Reports are regarded as an expendable luxury on the grounds that they take ‘too much time’.
Management Reports have an important role to play in communicating the current state of play and these should contain a summary that is easy for anyone to digest.
Observations such as “the value of stock held by the company is increasing, so it is important to avoid ordering items that are not allocated to a specific installation”, speak far more clearly than pages of figures.
In case the underlying point isn’t clear, the financial wellbeing of the company is not the sole responsibility of the Financial Director. Everyone in the company is responsible for ensuring that any targets under their jurisdiction – whether expenditure or revenue – are met, or that any significant variations from the forecasts are flagged up and dealt with.
Equally, bookkeeping and the production of Management Reports must be someone’s number one priority. If that isn’t the case right now, you should employ a bookkeeper, or use a specialist bookkeeping service.
Assuming that costs are under control and that you business is fundamentally profitable, the next thing to look at is how much money you are owed – money that should be in your bank account, not your client’s. It’s worth bearing in mind that if your business is partly funded by a loan, you’re effectively paying interest on the money your clients are using.
It is also worth considering that the people who mess you around over payments are also those most likely to experience difficulty in paying you – and the longer the situation goes on, the greater the risk that you will never get paid. If you want to know what happens to organisations that extend credit to bad risks, look at the share prices of banks.
(At this point, I am assuming that when you take work on, you enter into formal written agreements in which the schedule of payments is made perfectly clear, along with all your other Terms & Conditions. If that isn’t the case, your business is horribly at risk. This area is beyond the scope of this article but the organisation best equipped to help is CEDIA. It now has standardised paperwork templates for its members and covers the subjects of cashflow and pro-formas in courses including Introduction to the CI Business.)
Deciding the best way to go about bringing your debtors under control can be an agonising business because there are always the twin fears that an outside agency will cream off your profit as commission and/or recover the money so brutally that your customers are alienated. That can happen if you ‘factor’ your invoices – ie you transfer the invoices to a debt collecting agency which pays you most of the money upfront, then makes their money by recovering the whole amount as quickly as possible.
Having tried almost all methods of credit control, I can tell you that the worst possible solution is to do it yourself. Firstly, you’re already busy, so you’ll probably let the accounts slide out of control, meaning you’ll only deal with the situation when the payment is well overdue. Secondly, because it will be you on the phone, it will be your personal relationship with the client that gets damaged. Unless you’re prepared to engage a fulltime credit controller, I’d forget this route.
The variation I would also caution against is using one of those big solicitors that send out a standard letter threatening impending court action. Although these letters are cheap to issue, my experience has been that customers generally react in one of two ways. If they are honest, they are extremely offended – and if they are dishonest, they simply ignore you. The next thing you know, the situation has spiralled out of control and you are taking them to court, with the result that even if you eventually get paid, all the profit has gone out of the window.
The only solution I found to be effective and reliable was to use a credit control agency that would manage the process all the way down the line. However, some of these agencies are astronomically expensive. So find out in advance what the fee structure will be. The better credit control agencies will also agree with you in advance exactly how they will proceed on your behalf – the content and timing of standard letters, for instance, as well as whether or not they will seek your agreement before initiating debt collection action against the worst payers.
In the case of the service provided for my company, it was agreed that a letter be sent before money was due, reminding customers that our terms gave them 14 days to dispute any invoice.
As a result, the incidence of disputed invoices declined dramatically and it simplified the situation when accounts fell overdue because it was then the payment that was in contention, not the service provided.
This is an edited version of an article from Residential Systems Europe, April 2009