‘Cash is king’ might be as hoary a cliché as they come, but it’s overused for a reason; it’s astounding how many otherwise commercially sound, profitable businesses go under because they run out of cash.
Solid cash-flow management is not complicated, but it does require consistent discipline across the business and a commitment to following some simple rules. Here are some tips to help you keep cash flowing in your business.
Cash-flow plans
Forecasting your cash-flow is crucial and enables you to predict and prepare for highs and lows in your cash balance. This will allow you to plan borrowing accordingly. A forecast is usually done for a year or quarter in advance and divided into weeks or months. In extremely difficult cash-flow situations – recession hit firms struggling with late payers, for example - a daily cash-flow forecast might be helpful.
It is best to pick periods during which most of your fixed costs - such as salaries - go out. Base sales revenue forecasts on realistic estimates - see our guide on business forecasts. If you have an established business, an acceptable method is to combine sales revenues for the same period 12 months earlier with predicted growth.
Keep your forecasts and cash-flow plans up to date and realistic, and allow room for manoeuvre in your cash requirements; the ability to counter unexpected variances in the coming months could be the difference between a commercially viable business and one that folds. Be aware of your current cash position, forecasts and bear in mind fluctuations.
Manage working capital
Solid working capital management can dramatically improve your cash position across the business from helping to earn interest or reduce interest payments to contributing to a realistic annual budget and helping managers in different parts of the organisation to co-ordinate their activities. Obviously, the aim is lower stocks and debtors and sensible management of your creditors.
The first step towards this should be close management of your stock and debtors to minimise needs for working capital. Manage your supply chain, renegotiating with suppliers where possible to gain maximum credit. Similarly, if you need to extend terms with creditors, talk to them as early as possible and keep the lines of communication open. If past liabilities are an issue, consider approaching HMRC to agree payment by instalments. And of course, don’t ever commit to buying goods and services when you know you will be unable to pay.
Finance and safeguards
The source of your cash is also crucial to good cash-flow management; a balance between equity, long and short term debt and asset based or alternative finance is often desirable, though the right balance will of course depend upon the nature of your business. Tailor your financing to suit your requirements – don’t take on short term borrowing for long term investments. Always examine alternative opportunities for finance, including grants and tax credits.
There’s rarely been a more important time to consider safeguards. With the threat of bad debts looming over businesses of all sizes and descriptions, consider credit insurance, assuming it’s available. Prepare action plans for worst case scenarios e.g. a major customer going under. Conversely, if your business is failing, recognise the fact and seek help from professional advisers. If you’re confident of recovery, you could consider refinancing by seeking new equity, bank or asset-based borrowing, or, if institutions won’t play ball, try business angels.
Warning signs
- Think carefully before committing to a business model that will require further funding down the line, unless that further funding is contracted (especially in times of economic stress).
- Success - higher sales than forecast, for example - can increase working capital requirements and cause cash shortages. Don't overtrade.
- Underperformance (e.g. lower sales, lower margins or higher costs) will adversely affect cash flow. Consider reducing overheads to stop the cash drain, but take care in deciding which areas to cut.
© Crimson Business Ltd. 2009