From XU Magazine, 
Issue 19

Business MOT: Safety is important for your car, so why not your business’s cash flow?

Cash flow impact and risk management are always key to a business’s success, the same way airbags and seat belts are key to ensure safety in your car. Philip Douglas looks at why businesses owners should be treating their businesses like their cars when it comes to safety and risk…
This article originated from the Xero blog. The XU Hub is an independent news and media platform - for Xero users, by Xero users. Any content, imagery and associated links below are directly from Xero and not produced by the XU Hub.
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Let me start with an analogy for you.

A modern car’s collision warning system is built to try and prevent a collision for you. If ignored, it takes over and applies brakes before an accident can happen. This is technology widely used by consumers.

According to the Small Business Association (SBA) 50 per cent of businesses fail in their first five years. One contributing factor for this is cash flow management, due to businesses having limited systems in place to enable a view on risk prior to it happening. This technology exists and is rarely used by businesses.

So, why is it that these two situations, which are both rectified by the same solution, are treated so differently? It seems an odd statement, I know, but let me put some context behind it.

In the modern world, car safety is of the utmost importance. To facilitate this, manufacturers are introducing technology such as anti-drift, driverless parking and collision warning awareness. Relaying back to my earlier analogy, you could say that these types of technology attempt to make us aware of potential collisions that you and I may never be conscious of. For example, a car veering off a roundabout as you pull away may identify a possible collision and break on your behalf before your brain has had time to process the risk. These types of technological advancements are being absorbed by consumers at a rapid rate because, put simply, why would you not invest in transportation that is safer than going without it?

I know what you’re all thinking, “OK great pitch Philip, we can tell you like cars but what has this got to do with business?”.

Circling back to my earlier point, it’s a well-known fact that 50 percent of businesses fail in their first five years of trading. One of the main reasons for this is cash flow. Business owners are fantastic at starting their businesses in the first place, but what some are not so strong at is anything orientated to finance, billing, cash flow or compliance, a.k.a. the “admin stuff”

Some may employ an accountant to help and as they grow, they may bring the function back in-house for a dedicated finance resource to take onboard. For some businesses, this will work just fine, but where is the risk management? Has the risk simply been passed onto the accountant? Or in growing businesses, has the risk been passed onto the internal finance member? So hopefully my little analogy seems a bit clearer: both scenarios exist in their droves.

They say cash flow is king; always has and always will be. Most business owners, MDs or CEOs are typically experts in their field, and for some, they have or have had limited exposure to all the elements that make up good cash flow management because typically, this is managed and provided by someone else.

So, my point today is this: would you purchase a new vehicle knowing the manufacturer has not invested in technology to aid safety? It may not be one of your main considerations, but if you were to purchase a car without an airbag, are you not putting yourself at a higher risk of being injured than those with them? Simply put, investment reaps reward and it’s better to be safe than sorry.

As a business owner myself I want to know my risk even if someone else is managing it. Software must be a key part of this, as without it we are simply adding to the risk without knowing what we could have done to prevent the risk. This leads to being unaware that a “crash” is coming and therefore having no opportunity to manage the risk prior to the “collision”.

Most businesses we speak to see invoice management as being key in their requirements, the reason being that it’s a pain for finance and approvers to manage the receiving, keying and authorisation of purchase invoices. Software, like ours at Compleat, facilities this at a level of automate like no other. However, there is still an issue of managing risks in advance.

If your finance team receives an invoice today, it’s usually safe to assume goods and services have been delivered and the cost will hit the business today, as it needs paying. In my car analogy, this is the equivalent of an accident causing two blown out tires that have now worn down to the bare rim, which could have been prevented had the tyres been replaced.

So, if we’d have known that this purchasing decision could put our cash flow in the red, we may have made a different choice. The crucial element here is simply having the opportunity to make an informed decision and being consciously aware that you are doing so, versus remaining oblivious to future repercussions and therefore having no choice but to deal with the outcome when it happens.

The solution is simple. Purchase order automation with commitment accounting and real-time visibility of budget impact sitting inside current cash flow. This is exactly where business owners need to be.

Consider this, for the SME a business has outlined all intended costs into a budget, covering all indirect costs to support business activity as well as direct costs for company operation. This budget forms the basis on which the business can evaluate its progress throughout the year. Alongside this, the business empowers their users to raise a purchase order for every purchase they make. Better yet, if a system styled in a simplistic Ocado or Amazon design is used, this will be more familiar to users as they are used to interacting with these platforms as consumers. Purchasing on behalf of the business should not be any different to that of a consumer, where best price and best service are always considerations.

By raising a PO that follows a simplistic workflow for authorisation (if required) budget holders and senior management have immediate real-time visibility of impact risk for placing orders. This information, when viewed in conjunction with the budget, provides comfort or risk analysis, something that is non-existent without the use of software. Some may think using management accounts or a manual request from finance/accountants can provide this, but the reality is that this type of information is out of date the moment it has been issued.

For example, management accounts are typically issued two weeks after the month-end and provide the budget holder visibility of spend against budget for the previous month. Whilst this information is useful, it is important to have full visibility of the current budget and spend. In fact, the benefits of management accounts are just for finance processes only, they actually provide nothing that is meaningful to the budget holder as they’re not in real time.

To summarise, here’s my two cents for businesses. Using software, the business has a view of their commitments and can see the impact on cash flow. Once the invoice arrives the processing of this should be automated using 2-way (PO and invoice) or 3-way (PO, receipt and invoice) matching processes to allocate the invoice against the order. This then updates the spend view on the cash flow, so we can now understand the actual cost incurred versus the intended cost.

So, here’s my final thoughts. It’s important to remember cash flow impact and risk management are always key to a business’s success, the same way airbags and seat belts are key to ensure safety in your car should a collision occur. When it comes to your business, ask yourself this: why wouldn’t you put the measures in now to avoid risk later?

Why leave it there?

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