For any business to survive, the owners must do a number of things right and probably have some luck on their side. This is especially important in tough economic times when bad decisions cannot be absorbed by large profits and every increasing turnover. Getting the little things wrong makes business difficult. Getting the big things wrong is generally fatal.
As insolvency practitioners we see the results of many bad decisions. This lead us to consider the basics that business owners must get right, and to look for files that highlight what happens when they are not right. There are many basics, but we came up with four that we believe are important above all else. The only criteria that we placed on our search was that we had to be able to point to insolvency files that we had worked on that demonstrated these lessons.
Lesson One: Collect Your Money
Cash flow is the life blood of any business. Small businesses in particular are usually not well capitalised and rely on a steady flow of money coming into the business to meet the basic commitments. Cash flow rarely just happens by itself, and without the money coming in, money cannot continue to go out. So the first lesson is ‘collect your money’.
RBP Pty Ltd was a small family plumbing business. It handled small domestic plumbing jobs (fixing leaking taps etc.), fitting out domestic construction projects, and doing some larger commercial work. But the company became insolvent and we were appointed. The company had no money in the bank and a lot of unpaid creditors. But it had sufficient work to keep several qualified plumbers busy all of the time – in fact they were looking for more staff to handle the increasing work load. The director believed that he quoted reasonably well and was certain that the work was profitable. But there was no money and lots of bills.
As we examined the figures to determine whether we could continue to trade, we questioned the turnover (sales) figures as they seemed low. The response from the office staff was that the computer system did not show the completed jobs as sales until they had been invoiced to clients – and that had not been done for a while. How long? It had been a ‘few’ months since any invoices were prepared or issued to clients. How long is a ‘few’ months? Somewhere around ‘quite a few’.
It turned out that they were so busy getting work in, organising the work to be done and actually doing work, they never quite got around to billing the clients. Our first task was to get the office staff to prepare and issue invoices for all completed jobs going back over the ‘quite a few’ months – and there were lots of them. Unfortunately, given the time period between doing the work and trying to invoice it, some of the paperwork was lost and some jobs simply could not be invoiced.
We then had to collect the money. We looked at the debtor’s ledger and noticed that it contained a number of older amounts owing that had not been collected. The director advised that there were no disputes, he had dealt with these clients for years and that the amount was collectable. Why hadn’t they been collected? These customers usually did not pay until the director had called them personally and asked for payment. But the director was busy working and did not want to call in case he upset the client by asking for money and lost their work. Obviously that had to change.
It turned out that the company could not be saved, but during the course of the appointment we managed to collect over $260,000 from debtors and pay a substantial dividend. Any small business losing that amount of money from cash flow will suffer greatly. The fact is that it could have been avoided simply by invoicing clients regularly and having a debt collection policy.
Businesses need to collect their money.
Next Month – Build it, and they may not necessarily come!