Turnover is vanity, profit is sanity is a well-worn, but still useful adage, particularly for the top-line driven entrepreneur. But for the SME, cashflow is the only reality.

Entrepreneurs understand turnover because they have to be sales people before they’re anything. But an understanding of profit, and how it relates to turnover, demands an understanding of the other components of the profit and loss account, including pricing and costs.

Cashflow introduces another dimension ­ timing. As an entrepreneur, you want the people who owe you money to pay up fast ­ preferably up front. On the other hand, you don’t want to pay your creditors any quicker than is necessary to retain their goodwill and you don’t want any more stock than necessary sitting around unsold. Anything different from these three principles will put pressure on your cash.

For businesses in some industries these principles will sound nice in theory, but will be impossible to achieve in practice. Often, SME clients will be obliged to give generous credit terms, while others require stock sitting around for a long time.

Too many businesses don’t manage the timeframes efficiently ­ and are forced to look elsewhere for cash. Paying suppliers before their terms require is a good example of how to put unnecessary strain on your cash resources.

The best source of cash is the business itself ­ get the business engine to generate the cash you need to finance it. But for most this is unlikely to be sufficient. If the business has assets it might be possible to borrow against them. But many SMEs are asset poor, so they will need to finance the interest ­ and with the cost of borrowing increasing, debt is less attractive, assuming that you can find it in the first place.

The other source, of course, is equity ­ either your own pockets, or investors interested in putting money into the business. Such investors can be difficult to find and many entrepreneurs are reluctant to give away shares in the business they’ve founded, confusing ownership with control.

But if new money is the difference between achieving a growth plan and not growing at all, then equity investors should be welcomed in ­ particularly if they bring ideas, experience and custom.

Getting a decent financial manager is another important challenge for the SME. Book keepers get older and more experienced, but they rarely turn into decent financial directors. A good one costs, but not finding a good one will cost more. A good one won’t just keep the books, they will shape the financial strategy of the business ­ where the money comes from and how it is used.

Maintain control

However, a decent financial manager will not give the founding entrepreneurs an excuse for washing their hands of financial matters. If the first mistake is not recruiting a decent financial manager, the second mistake is abdicating responsibility for finance once you’ve done so.

Managing finance in an SME can be boiled down to a few golden rules: more cash is better than less ­ so keep prices up and costs down; cash now is better than cash tomorrow ­ so collect it as soon as you can and spend it as late as you can; and safe cash is better than risky cash ­ so don’t be blinded by starry lights and flashy risks.

Cash, time and risk are affected by the rules of the game you are in, the incentives you offer, and the characteristics of the players you attract. Understand the game and how cash works in it and you will be better off than many in the same industry.

Getting paid

• Good cashflow depends on an active approach to credit management. The Better Payment Practice Campaign has a searchable online database of prompt payers as well as a wealth of credit management information.
Go to www.payontime.co.uk

• Export markets represent a wealth of opportunities, but there are widely differing payment procedures and conventions even within the EU. Credit insurance company Atradius has country reports on its website providing background economic information as well as hints on collection measures and legal points.
Go to www.atradius.com

• Good credit managers are often an over-looked resource. The Institute of Credit Management helps set professional standards and provides accredited qualifications.
Go to www.icm.org.uk

• Other sources of cash: invoices, buildings, plant and machinery ¬ all assets against which SMEs can realise cash. The Asset Based Finance Association represents factors, invoice discounters and other asset-based lenders.
Go to www.abfa.org.uk

Rupert Merson is a partner at BDO Stoy Hayward