Business Planning - Managing the money

Keeping careful track of your cash flow is key to any successful business, says Neville Stein.

Image: Adam Gault/Alamy
Image: Adam Gault/Alamy

Managing a business can be a fraught experience. Perhaps the greatest worry faced by most owners of small and medium-sized enterprises is running out of cash and therefore not having enough money to pay wages and suppliers.

The movement of money into or out of your business is known as cash flow and cash flow problems occur when more cash goes out than comes in over a given period. Clearly, this affects a company's liquidity - the ability to pay its debts when they fall due. We can all think of instances when a fundamentally sound business has failed due to short-term cash flow problems. Being profitable does not always mean being liquid.

How do you know when you are running short of cash? Obviously, you need a system that allows you to monitor your account daily. Internet business banking is ideal for this. You can also set up email or text alerts to warn you if your balance falls below a certain amount. Of course, that may be too late for you to do anything to rectify the situation. You need to know in advance how much will be in the bank, and the simplest way is to produce a cash flow forecast.

Strapped for cash

A forecast will highlight those times when you may not have enough cash to meet your obligations to your debtors. You also need to review your statements quite robustly and pick up any warning signs. If your bank account is constantly at or over the limit of your overdraft, for example, with no significant period in credit, then you have a problem. Likewise, if you are being refused credit from your suppliers, and maybe have to use a credit card or personal savings to make purchases, then you definitely have a cash flow crisis.

So what can be done to improve your cash flow? Thankfully, quite a lot. Here are some simple steps:

1. Produce a cash flow statement and look at it every day - make it the first thing you do in the morning. This is so much easier to do these days with online banking. When you need to make purchases, ask yourself: "What will this do to my cash flow?"

2. Be more proactive in collecting unpaid invoices - now.

3. Cut your costs. Take a considered look at your outgoings, but beware of rash decisions. Can you delay a purchase until cash flow has improved? Do you really need to make planned purchases now? Will they add value to your business? Whatever the decision you take, make sure that you are not wasting money - look at ways of making savings in your operation.

4. Improve your sales and give your customers an incentive to pay quicker. Maybe a discount for cash on delivery.

5. Negotiate a better deal. By improving your negotiation skills, you should end up paying less for your purchases.

6. Get extended credit. You might use your negotiation skills to obtain extended credit - buy now, pay later. This might be more valuable to you than a discount.

7. Finally, look at your assets such as vehicles, plant and equipment. Do you need all your assets? Can you sell some to raise cash?

Sometimes, although managers have taken all the steps they can to improve cash flow, problems still arise. Clearly, poor spring sales have affected many in our industry, resulting in cash flow problems. If you are experiencing this, what else can you do? If your business is fundamentally viable then it might be possible to raise some short-term finance in the form of an overdraft.

Dealing with banks can be very challenging, but you can make the process smoother by having very detailed and accurate management accounts including robust cash flow forecasts. Another way to fund a short-term cash flow problem is to get your cash in quicker from your customers while negotiating extended credit from your suppliers. This process can often be measured and your accountant should be able to do this for you.

The two measurements to use are credit days (the average amount of time your customers take to pay) and debtor days (the average amount of time you take to pay your suppliers). If, for example, your creditor days are 60 but your debtor days are 30, this would mean you are paying your suppliers before you get the money in from your customers. Reversing this scenario will improve cash flow, but it may not be a sustainable strategy. Your suppliers need to be nurtured, so keep them informed at all times if you are having cash flow problems. If this is a deliberate strategy, however, beware, because when stock gets short you can bet your bottom dollar that the company that will get stock is the one that pays its bills quickly.

Sometimes companies develop a cash flow problem because they have financed capital expenditure such as the purchase of new vehicles, a potting machine or an improvement to the infrastructure of the company from cash flow. They do this generally by building up the amount they owe creditors - by delaying payments.

Financing strategy

Long-term improvements are ideally financed through long-term borrowings, typically a bank loan. This will invariably be cheaper than an overdraft but your bank will want to see some well-managed financial statements such as a profit and loss account, balance sheet and a cash flow statement. You will also need to produce a cost/benefit analysis - in other words, identify the extra profit brought into the business by the proposed improvements.

Cash, as they say, is king, so paying attention to your cash flow and not ignoring it is a vital element in managing a business. As your business develops and grows, so too will the need to manage your cash more robustly, and while this may not be the most interesting aspect of business management it is the area that makes or breaks a business. You have been warned.

Neville Stein is managing director of business consultancy Ovation.

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