Why cash flow is king for businesses and how the government needs to step in to help.

I had a meeting with one of C-View Technologies board advisors on Friday afternoon, we try to catch up at least once a month over a coffee and a piece of cake. This meeting was no different from every other as we started by discussing the cash flow, this particular advisor is from a blue chip company and very financially / operationally focused but you can tell she is often perplexed by the regularity of cash flow hitting the conversation. For our business we are in many ways very lucky we have a subscription model with customers paying regularly every month in a fairly predictable manner, as a SaaS business our fixed costs have always been lower than you might expect and all the stake holders from day one have been in this for the long haul and not the quick win so we don’t drive Astons and can run lean and fast as required. The issue for CVT when it comes to Cash flow is our investment planning and the fact that very few clients pay on time or in any predictable way.

Many of our customers are globally recognised brands which is a double edged sword as often Finance has very little communication with the people we work with. The payments people have targets of their own and will tell you one thing and do the opposite. We have some customers that pay over 120 days late but the same clients might also pay us on time for a different invoice. This makes growth and investment predictions and planning almost impossible and that has an impact on hiring, our own payments, and purchase choices for third party providers the list goes on. The knock on of this is that the economy (For CVT the UK economy) loses out and to what end? Most importantly we are not alone as we communicate with an ecosystem of tens of companies all in the same or similar situations.

So what can be done?

My suggestion is simple with predictability comes stability which allows growth and that is in itself a reward for a government trying to grow out of a global recession. The plan has X steps:-

1. Legislate payment terms of 7 days. The EU mandates payment terms of no more than 60 days but why that long?
2. Provide standard terms and legal recourse. T&C’s are a mine field for the smaller business and few shop keepers or start-up founders etc. understand what the implications mean to them and certainly don’t often have the reserves to create new versions so end up copying terms from the web.
3. Provide a central form of recourse. Almost two years ago we had a significant client who walked away from a significant debt for us. We could have chased in court but the time it would have taken and the cost meant that we had few options. If the government could provide a fund to up front pay a proportion of the debt and then the infrastructure to hunt down the debt then most companies would not risk it in the first place but also small to medium businesses could afford to take bigger bets.
4. Speculating to accumulate. I spoke to a Web business MD in January about why he turned down a significant contract with a G500 account. His answer was the upfront investment combined with the payment term delays meant he couldn’t afford to take the deal. Worse still the business didn’t go elsewhere the opportunity died on the vine.
5. Investment would be more secure and easier to find. Many people lament about the lack of funding for small businesses either from banks or the government but actually with the way the economy is still moving this is a risky business to be in even now. Many more start-ups go bust than survive to grow and so interest rates need to be significant to sustain this model. But with a legislated payment plan a centrally managed investment fund backed by banks could actually be a very safe vehicle for the investor community. This also benefits the entrepreneur as they can clearly borrow what can and will be payable with the X factor of cash flow being at least significantly reduced in the medium term.

Obviously these concepts need to be thought through and expanded by smarter people than I but the basic concept of supporting companies to reduce the issues of cash flow born from success, as opposed to cash flow that kills a failing business that doesn’t have customers, has to be considered in this day and age.