No matter the type of business you are in, the core of your business must run smoothly to increase the effectiveness of all that is done within your business.
Every aspect of the business will impact on your Cash Flow at some point, so it is important that the financial heart of your business is operating at maximum efficiency.
Companies with money in the bank are better equipped to deal with any crisis which may arise.
An accurate cash flow projection is essential, it can alert you to potential trouble before it occurs which gives you the opportunity to implement preventative measures. There are a number of steps you can take to improve cash flow management, and you should consider the following:
Debtors
Chasing late debtors, particularly during an economic downturn, can be time consuming and hard work. It is wise to do a credit check before taking on any new customers and to agree your business terms in writing before opening an account.
Such terms can include early settlement discounts and interest charges for late payments.
It is also important to set up a credit control policy with clearly defined credit limits for customers. Debtor lists should also be reviewed and monitored on a regular basis and a policy set up for chasing and dealing with customers who are late with payments.
Creditors
Suppliers play a key role to the success of your business and it is important that you understand their terms of business to ensure they fit in with your circumstances. If you are involved in one off contracts you should review the terms and conditions and renegotiate if necessary. It is also preferable to agree extended payment terms in advance of a big contract rather than running up excessive credit or delaying payment.
Stock
Carrying too much stock means you run the risk of tying up funds. Excess stock can also incur unnecessary storage costs and you run the risk of holding stock which may become obsolete.
The aim is to focus on fast moving profitable lines which will help you to gain competitive advantage. If you have too much stock consider discounting slow moving inventory to generate cash and try to eliminate unprofitable items altogether.
Work in Progress
If WIP is not properly managed, quick cash-turn and profit opportunities are lost. If you are planning to enter into a large project you should agree a staged payment plan which will allow you to manage the cash flow. This can also benefit your customer as they will be able to spread payments rather than being hit with a final bill at the end of the project. It is also good practice to invoice for any additional costs as soon as they arise to avoid any disputes at a later date.
Always get sign off from the customer before you agree any additional work.
Personnel
Be realistic about your staffing requirements. Make sure there is a good business case to support the recruitment of new personnel. You should look after high performers as retaining good staff is cheaper than recruiting and training new ones. If you need to reduce staff costs, consider alternatives to redundancy such as short-time working, pay freezes or cuts and the removal of overtime. Keep staff informed and engage personnel in cash management and cost-control strategies, setting targets and encouraging suggestions for improving process efficiencies.
Expenses paid in advance
It is not just business rates that can be paid in instalments – many costs can be spread to improve cash flow. Examine all your payments in advance and see if there is a payment plan option that suits your business. There may be an interest charge, but this could still be less than you pay for your bank facilities.
Overheads
It is important to review your overheads regularly and differentiate between those which are mandatory and discretionary. All discretionary payments should be reviewed to ensure they support the strategy and future development of the business.
Equipment
You should regularly review your fixed assets and aim to sell those which are no longer required. Business plans should include a replacement programme but it is important to distinguish between essential additions and ‘luxury’ items.
Tax and VAT
All companies should aim to file their accounts in good time. There is increasing reluctance from HM Revenue & Customs to allow firms to defer tax payments under its ‘Time to Pay’ scheme. If you need to delay paying your taxes, it is essential that negotiations with HMRC commence sooner rather than later. Make sure the VAT scheme you are using is the most appropriate one for your business.
Work with your bank
It is important to develop a good working relationship with your bank to ensure they understand your business requirements. You should ensure that the business’s financing arrangements are properly structured and are supported by accurate and up-to-date financial information. It is important that you do not breach any covenants agreed with your bank.
Key Performance Indicators
Identify the KPIs for your business, particularly those relating to cash, and monitor them regularly. Useful KPIs could include cash in the bank, debtor days, stock turnover, sales leads generated, orders fulfilled and gross margin.
In summary
Cash is the lifeblood of every business. Whether in good times when business opportunities are expanding or in recessionary periods when margins are tight, controlling cash is essential for survival and success.
Without cash to pay suppliers and staff and to service loans, a business – even a profitable one – will ultimately fail.