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The cash flow puzzle - The SME/big-business disconnect

‘Cash flow’ is one of the most confused and complex issues facing SMEs and their suppliers.  The cash flow puzzle is riddled with misguided impressions and contradictions.
To start with there is a disconnect between what an SME thinks ‘cash flow’ is and what a big business thinks it is.  Further, there is a view that that key financial suppliers to SMEs – that is banks – are not seen as credible providers of information or insight about cash flow.  But in contrast, bankers believe that they have a better understanding of SME cash flow than the SME does.  
What a mess.  
Clearly this is an enormous issue to both SMEs and their suppliers.  There are four relevant issues to note ... 
1. Cash flow is important.  At the outset one thing that is abundantly clear is that every business owner realises that cash flow is critical.  There can be no doubt about this and it can be taken as a ‘given’.
“Cash is everything in a small business, in fact it’s the only thing that really matters.”  (Entrepreneur, 4 FTEs)
“It’s like liquid gold.  That’s what it’s all about.  Don’t give me your accruals, give me cash.  Give me cash every day of the week.”  (Mortgage finance, 11 FTEs)
“Cash flow is king.  Cash flow is the lifeblood.  So anything that grossly affects our cash flow we will try to stay away from.” (Physio, 30 FTEs)
“Cash flow is the blood that runs through your veins in the business.  It keeps you alive.”  (Not For Profit, 5 FTEs)   
“It’s the one thing that keeps you awake – you really do stress out about it.”  (PR, 25 FTEs)  
“Cash flow is paramount.  For me as the business owner, cash flow is the most important thermometer that you can have on your company. ‘Cash Flow’ is the most important concept for you to grasp as a business owner.” (Online sales, 8 FTEs)  

2. Opinions vary on what cash flow actually is!  Some years ago we asked business owners to define cash flow.  The answers were interesting and sobering.  Quite a number of businesses indicated that cash flow is simply the amount of cash that they have in the bank.  While this is an important issue, the reality is that it is not cash flow.  ‘Cash flow’ is about precisely this – the flow of cash in and out of the business.  Expressed differently, cash flow is not a static ‘moment in time’ measure – indeed it can only be viewed over a period of time.   As is evident from the following comments, some ‘get it’ and some don’t …
“Cash flow to me is what’s in the bank – that’s cash flow to me.  I’ll look at the bank and say ‘there’s $26,000 in the bank.  That’s my cash flow’.”  (Restaurant, 20 FTEs)
“It’s what’s available at any given moment.  If I looked at the account right now what is the surplus?  It’s surplus.”  (Insurance Broker, 62 FTEs)
“The cash balance at the bank – that’s my cash flow.” (Business Consultant, 2 FTEs)
“To me it means how much money I have in the bank that I can spend.” (Beauty Salon, 3 FTEs)

In fairness, some have a much stronger grasp on what cash flow is …
“Cash flow is basically the in and out of money.  But you have to have it coming in at the right pace for it to go out.  So the cash flow is literally that – if I look at my business, cash flow is what comes into the business and from there it flows back out to people that I owe money to and so forth.  So that is the flow of cash through my business.”  (Car servicing, 9 FTEs)
“My definition of cash flow would be making sure that more money is coming in than is going out.  And it’s coming in on time so I can pay my bills on time.  If I start getting behind it becomes a real challenge.” (Painting, 17 FTEs) 
“I think a lot of people treat cash flow as if it’s profitability.  And that’s where they run amuck.  I don’t believe it’s the same thing.  Cash flow is the access to credit, or your own hard cash, but it’s not profitability.”  (Business Services, 55 FTEs)

3. Cash flow can be a huge struggle.  While not all businesses face cash flow pressure, those that do often see it as their biggest challenge that they never really get on top of.  So not only is cash flow important but managing it is an ongoing struggle.  
4. SMEs have a very limited view on how a bank can inform them about their cash flow.  While they can see a role for bank ‘product’ they are sceptical of the bank’s role in cash flow information and advice.  From a ‘product’ perspective business owners can point to many bank offers that help them to manage their business in light of tight/chunky cash flow – ie overdrafts, lines of credit, merchant services, even factoring/invoice discounting etc.  
But more broadly, SMEs don’t think that banks can offer them much in the way of insight or information about their cash flow and how they can improve it.  They are incredibly cynical about the role of the bank if this context. Rightly or wrongly but do not feel that banks can help them to better understand what cash flow is and what levers they can pull to improve it.  There are a number of reasons why they feel like this but at the heart of it is the one of our core insights about SME Operators.  They ALL think they are different ... unique ... special.  They believe that for an organisation to be able to offer them insights/advice – and not simply products – their subtleties and nuances need to be understood.  They simply do not believe that their bank could possibly know them well enough to be able to do this. 
Further, there is a perception that bank(er)s view cash flow in an academic or intellectual way, whereas to a business owner this does not reflect the reality of how cash flow works in their business.  Again this talks to the differing views on what ‘cash flow’ actually is …
“The accounting view of cash flow is very different to the reality of cash flow.  You know that very simplistic view of accounting that most bankers are taught at University and most accountants are taught at University?  It doesn’t really exist in the real world.  In the real world you’ve got to fight to get it, it comes in at certain stages, you might be lucky, it depends on the client. You can’t have an overall metric around ‘the days it takes to get paid’.  You know with some clients that you ask for money up-front. And you know for some clients that 60 days is fine and it’s all they can manage but you know you’ll get paid.  All the metrics they use to evaluate your business don’t really matter.  It’s not a smooth thing.  What people are looking for is trends but the reality is that running a small business is not about trends.”  (Entrepreneur, 4 FTEs)
“They don’t understand cash flow.  They’ve become asset lenders – and what I mean by that is ‘show us your physical bricks and mortar properties and I’ll lend against that’ – and it’s set-and-forget lazy lending.” (Entrepreneur – business services, 90 FTEs)
“I wouldn’t be looking to them no – because they wouldn’t understand our business.” (Retail, 500 FTEs)
“They don’t want to help you, they want to lend you more money.  That’s not solving your cash flow problems, that’s kicking the can down the road because that’s going to create more problems down the road … I don’t think that the bank would know any more about cash flow than I would.”  (Investment Banker, Sole Trader)
“I don’t think that they’d know how my business works so well …  I don’t know if they know my business well enough to be able to come in and say ‘we can help you manage your cash flow better by doing this.” (Retail Tyres, 4 FTEs)  
“If banks understood cash flow, they’d lend on cash flow.”  (Intranet/Web hosting, 95 FTEs)

In many ways the perspectives of SME Operators may be quite harsh, objectionable, and possibly very wrong.   Certainly they are contentious.  For a bank(er) to be told that they do not understand how to improve a SME’s cash flow is somewhat offensive – many bankers would argue that if there is one thing they DO understand above all else it is a business’s cash flow.  But this is now how business owners see it.  
‘Cash flow’ is a confused and controversial issue in the SME arena.  Business owners have a limited understanding of what it is ... yet they think they know (and often feel patronised when others try to tell them what it is).  They think that they are unique and that their differences and subtleties need to be understood by any organisation wishing to offer them insight and advice on their cash flow.  They believe their banks don’t have this understanding.  Attitudes and perspectives on cash flow are a key disconnect between SME Operators and their large suppliers. 
Next month : ALL SMEs are different

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