Managing Your Cashflow

The most critical issue for almost every business and often the one that does not get the attention that it deserves is managing cashflow. There are many stories of profitable businesses that have gone to the wall because they have run out of cash. Here are a few ideas to help with cashflow management:

• Measure the cashflow. You can’t manage it if you don’t measure it. Prepare a cashflow projection for the year, the quarter and the month with increasing levels of detail. Have a plan for next week if things are a bit shaky. You don’t need to be an accountant to forecast your cashflow.
• The projection is exactly that – a projection, not an accurate formula. It is your best estimate of all the cash coming in over a period versus cash going out. You will need to use your knowledge of the market, your expectation of sales and customer behaviour patterns to make the most accurate assumptions that you can. You will also need a line item in your projection for each major item of expenditure and show when it is expected to be paid
• If the outlook is tight, look for ways to release cash into the business
  • Receivables: Get invoices out promptly and chase payments before they are due. Offer incentives for quick settlement. Ask for deposits and progress payments. Have a credit policy and stick to it.
  • Payables: Don’t pay bills before they are due. Negotiate better payment terms with suppliers. Source raw material on consignment. Look closely at the value of settlement discounts
  • Shorten the operating cycle: Review every aspect of your operation to reduce the amount of time between raw material coming in and finished goods being invoiced. Reduce inventory levels. Clear dead and slow moving stock.
  • Debt factoring: Consider using a financial factoring service to take on your debtors function. Factoring will discount the amount that you will receive but will provide immediate payment of invoices

Planning ahead is vital. You will be in a much stronger position to arrange a line of credit with your bank when your cash position is strong rather than waiting until you are desperately short.