Cash flow is key to any successful business - a lesson that many companies forget, says Howard Lent
Cash is king, goes the old cliché. But as with many clichés, it has become one, because it is a truism. None more so than for brokers. Cash flow management is vital to the health of a broker's business and it is in the day-to-day management that cash is most effectively controlled.
While profit, turnover and market share are all indicators of success, if there is no cash in the bank to meet monthly bills, wage runs and loan payments, then any business will ultimately fail.
"By choosing the right combination of debt and equity, businesses will be able to take the fullest advantage of any opportunity without draining the life blood of your business - its cash," says Sian Lloyd-Jones, chief executive of Finance Wales, a group created to boost small and medium-sized businesses in Wales.
In its simplest form, cash flow is the movement of money in and out of a business. It is the life-blood of all growing businesses and is the primary indicator of business health. The dictionary definition of cash flow is nothing more than: "the movement of money into and out of a business."
But the effect of cash flow is real and, if mismanaged, totally disastrous. Cash needs to be monitored, protected, controlled and put to work.
The key to successful cash flow management is effective cash flow budgeting, cash flow forecast preparation and cash flow monitoring. Often this is not afforded the time or importance that it desires and deserves, especially in new start and emerging businesses.
Glen Bullivant, vice-chair of the Institute of Credit Management, writes in the Credit management handbook: "A major element missing from business plans submitted to banks for funding approval remains covering arrangements for invoicing and account collection - small businesses still believe that doing a good job and/or supplying a good service is reason enough to be paid on time."
It is important therefore that a broker does not underestimate the cash-to-business relationship as this plays such a critical part in the success of any venture.
There are three basic principles Finance Wales recommends regarding cash management. First, cash is not given. It is not the passive, inevitable outcome of business endeavours. It does not arrive in your bank account willingly. Rather, it has to be tracked, chased and captured. Brokers need to control the process and there is always scope for improvement.
Second, cash management is as much an integral part of a broker's business cycle as, for example, making and preparing detailed consultancy services.
Third, information is vital. For example, brokers need immediate access to information on such things as customers' credit worthiness; customers' current track record on payments; suppliers' payment terms and investment options.
"Cash-flow management is key to any business - debiting premiums/fees and collection of these must be managed to maximise cash flow and income," says Biba chief executive Eric Galbraith.
But the worry is that professional cash management in business is not always the norm. In a poll conducted on the Better Practice Payment Group, nearly a quarter of the respondents declared that they never confirm their credit terms in writing with customers.
"You will find, therefore, that the cash management process has a double benefit: it can help you to avoid the debilitating downside of cash crises and, in addition, grant you a commercial edge in all your transactions," says Lloyd-Jones.
Sound cash management gives a business as much of an edge as, say, as an improvement in service delivery. But practical factors, such as the interest on credit, play a major role in balancing the books. But should brokers turn to traditional lenders, such as banks or premium finance companies?
Steve Rowlands, managing director of Plymouth-based broker Walker, Persson & Spargo (WPS), says that for his broker firm the interest rate is a key factor. "We have to take notice of interest-free credit if it's offered. And as rates have fallen and premiums have gone down then premium finance has become more attractive."
Tim Wilson, sales and marketing director, Close Premium Finance, says premium finance companies are well positioned here. "Because of the existing close relationship, the premium finance provider is ideally placed to be able to offer low-interest loans to the broker.
"These might help out with the annual FSA fee - which can make a significant dent in cash flow - or be used to build the business in any number of ways, such as an investment in IT."
Moreover, if a client has eight policies with eight different insurers, all can be combined with one direct debit through a premium finance company.
But Rowlands says: "We look at whatever is best for the client. If it's not interest-free and we know that our facility will be more competitive, we will promote ours."
However, Wilson says the advantage is that if a premium finance provider is involved, the broker is guaranteed the premium on time. He adds: "There's no more chasing clients for money, no more cashing cheques that might bounce, and no more checking BACS payments. There's less admin and more peace of mind for the broker with premium finance."
Using a decent premium finance provider can help the broker by making faster payments to them so that they have the monies before they need to settle with the insurer.
"Doing this clearly helps to ease their cash flow," says Wilson. "For the personal lines broker, this might mean paying the broker more often than once a month, which was traditionally the case."
Although if a policy is cancelled, the premium finance provider will want some money back. "But if the insurer settles late with the broker - not unheard of - the broker will need to fund this money out of their own pocket in the meantime. For personal lines policies, the more sophisticated premium finance provider recognises this issue and provides a facility for delaying debiting the broker's account," says Wilson.
And Bob Lilley, managing director of Credit Indemnity & Financial Services, says that under FSA rules, cash flow management is important. "Under FSA requirements brokers need to keep clients funds separate from their own finances, so brokers must be aware of cash flow and how to handle clients' monies."
"Even in an ideal world, with all customers paying on time, granting credit means that there will be a credit period that will require funding," advises Bullivant.
"Businesses today pay high interest rates compared to their low net margins. It follows, therefore, that in order to reduce the impact of interest expense, they must concentrate on ensuring well managed debtors in proportion to all sales made."
Bullivant also notes that some of the most successful entrepreneurial businessmen and women often proclaim to having a unique product or knowing a market better than anyone else.
But often, the key to their success has been their ability to keep a close control over their cash flow. That should be a lesson to all brokers. IT