Cash flow management

To all businesses cash is the lifeblood of the business and without it they cannot survive. When a business is growing and extending its credit to customers cash requirements become greater.

Follow the links below to view information on all elements of cash flow.

New Finance, Sales, Purchases and Taxes
Cash Flow Forecasting
Using Forecasts
Sales
Credit Control
Controlling Expenditure
New Funding

New Finance

This is often a ‘one off’ boost to the cash inflow of the business and may take one of several forms:

• Loans from family, friends and banks
• Overdraft facilities provided by banks
• Factoring of invoicing
• For larger companies, issues of shares

Sales

The main inflow of cash is from the sales made by the business. When a business sells on credit, cash inflows are delayed until the business is actually paid therefore tight credit control policies and procedures are essential.

Purchases

All businesses buy goods and services for use within their business. Items such as materials for manufacture or resale, capital items such as machinery and computers, and services such as rent, rates, electricity etc.
Businesses will often have to fund work in progress for considerable periods before being paid.

Taxes

Vat, national insurance and business taxes such as corporation tax are regular cash outflows that are paid out in lumps. Buying large items such as capital spend on machinery and computers at the end of a vat period can help improve cash inflows for a short period:

• Returns on Investments
• Capital and interest on loans need to be repaid.
• Limited company investors(shareholders) require dividends on their investments.

Cash flow forecasting

The more warning a business has of peaks and troughs the more time the business has to deal with them.
Most accounting software make it easier to prepare budgets and revenue and expenditure projections.
Specialist programs such as sage financial forecasting allow maximum flexibility for producing ‘what-if’ scenarios e.g. what is the effect on cash flow of a 10% increase in sales or an increase in credit periods allowed from 1 month to 2 months.

In order to control cash flow the business should:

• Prepare annual budgets showing the level of sales that the business expects to achieve and the costs involved in doing so.
• Prepare monthly (or weekly) cash flow forecasts looking ahead for 1 year and updated monthly or quarterly.

These forecasts help to identify when you will receive money into the business and when (if ever) there will be a shortfall. They allow you to identify the major outgoings such as monthly payroll, quarterly vat and you can ensure that money is available for these.

The key to good forecasting is to be realistic at all times. For regular sales use established figures for volumes, pricing and time taken for customers to pay. For new customers or new products/services be pessimistic, expect problems and delays.

Include the forecasts and budgets in monthly/quarterly management accounts which can be sent to your bank. If you need help in producing budgets, forecasts or management accounts please call us on 01384 468320. We have over 20 years experience in providing these services.

Using Forecasts

Monitor actual performance against the budgets and cash flow forecasts regularly identify any problems and take action to rectify them. For example - If it is identified that there will be a substantial cash shortage in six months time the business can possibly reduce stocks or negotiate extended credit with suppliers for that period.

By comparing the current performance with the budget or forecast the business can identify if it is on track or not and whether more effort is required in certain areas of the business such as increasing turnover or reducing stocks.

Before taking on any substantial commitments such as new machinery or taking on a major new customer the business can ensure that it has enough finance to meet the costs involved.

An early warning system can be developed which can identify when something in the business needs querying such as sales are falling behind forecast, a substantial customer stops buying from the business, or expected contarcts are delayed.

Sales and Marketing

Todays sales is tomorrows cash!

The overall aim of the business must be to increase turnover and profitably. Increasing selling prices may reduce sales and hence cashflow in the short term. This is often however this is often outweighed by its positive impact on profitability and cash flow in the long term.
Even profitable companies can become insolvent by overtrading. This happens when the business has to pay all the costs it incurs before receiving the cash from its customers.

• When negotiating new contracts with customers try to make cash flow generation one of the primary objectives.
• It may be surprising how easy it is to include deposits for materials required to be included in the terms o the contract.
• Where contracts will take time to complete try to negotiate stage payments. Include a timetable for a customer to pay within the contract.
• Agree clear specifications for the work to be completed and even specify arbitration requirements to minimise the possibility of the customer disputing any invoices.

Improve your sales and cash flow by making sure that all work is invoiced as soon as possible.

Bring forward cash inflows by offering discounts for early payments.

If the business pays sales commissions ensure that they are paid on receipt of payment not on invoice. This has the benefit that it delays payment, it encourages the sales people to assist in credit control procedures and they do not get paid for ‘sales’ that are to be credited later.

Credit Control

An effective credit control system speeds up cash collection and reduces the risk of bad debts. It also saves the business owner time which can be utilised profitably and shows customers that the business is run professionally.

• The business should control how much credit it provides and to which customers. (Specialist companies such as Dun and Bradstreet or ICC can provide information on companies to assist in assessing credit limits)
• Send out invoices immediately on delivery of the goods or services. If appropriate make a follow up call . Confirm that all invoice details are correct and that there will be no problem paying by the required date.
• Monitor all late payments and chase them up, largest debtors first. Using a debt collection agency or a specialist solicitor can be an effective method of dealing with slow payers.

Controlling Expenditure

Always get at least two competitive quotes for purchase requirements.

Implement simple cost control systems across the business.

• Ensure that there are no overcharges by suppliers such as double billing or not getting agreed discounts.
• Make sure there are no unnecessary costs in the business such as leaving lights on or heating the premises at night.
• Ensure that the business gets value for money by not using high priced suppliers.
• Reduce inefficiencies within the business such as using paper based systems which could be computerised (and reduce cost in the long term).

If the business holds stock, good stock control can help the business release substantial funds by:

• Only purchasing what the business requires when it requires it.
• Identifying seasonal peaks and troughs and setting stock level requirements accordingly
• Setting a target stock turn for each category of stock and monitoring it carefully. By holding lower stocks the business will also reduce the amounts of scrap and obsolete stocks it has to write off.
• Working closely with your suppliers to develop just in time deliveries.
• Sell off slow moving or obsolete stock at a reduced value to assist in cash generation.

New Funding

• Overdraft and loan finance can often be limited by the amount of security that can be given to the bank.
• Factoring can often be used to raise finance based upon the outstanding value of invoices.
• Business undergoing a period of sustained growth often find this the most flexible source of funding.
• Asset Finance can be used to purchase capital items such as computer equipment and machinery.
• Both hire purchase and leasing allows the business to spread the costs of acquiring equipment with the asset itself providing the security.
• A strong underlying financial base of equity finance (shares) and directors loans is vital for new businesses. Subsequent injections of equity finance can be utilised to achieve stepped changes in the business such as acquiring another business or opening a new factory.

Edmund house, 27 St. James's Road, Dudley, West Midlands, DY1 3JD