Author: Barry Hill
Barry Hill specialises in turnaround situations for Small to Medium Enterprises (SMEs) who often have extreme cash flow problems. He is a qualified accountant with a background as Finance Director to a variety of SMEs, along with international experience with larger Companies.
Cash is King
It has been said before by many, but it is worth repeating – ‘Sales are flattery, profits are sanity but cash is king’.
It has been reported that 30 per cent of companies in the South East still suffering from cashflow issues.
Follow these cashflow guidelines and this will help to ensure your liquidity remains robust:
Plan your Cashflow year – If your business experiences peaks and troughs in demand. Prepare for these and put in place measures to ensure your cashflow reflects the changes.
Don’t bulk buy – hold as little stock as you can and turn it over quickly. Agree with your suppliers a right of return of unsold stock. Look at getting stock on consignment (you do not pay before it is sold). Can you get your suppliers to deliver to your customers on your behalf? Careful planning should eliminate this potential drain on cash.
Keep costs down – Review all your cost items (including products and energy) and relate this to efficiency. I have read that turning off one PC overnight can save over £50 a year.
Run a credit check on customers and potential customers – look at the credit histories with a view to eliminating late or non-payment. Try to instil in your staff the thought that ‘a sale is only valid when the cash is in the bank’. Before accepting an order ensure the customer/potential customer accepts your payment terms – in writing. It is also essential to enforce your payment terms and if a customer doesn’t pay, put them on a stop.
Invoice promptly – issue them as soon as is practical. Soon after they are issued contact the customer by phone or email ensuring they have the invoice in their system and that they have no problems with the supply – record this. Get them used to paying on time. Remember “a sale is only valid…”
Ensure your systems advise you of late customer payments – keep an eye on your debtors’ days (trade debtors’ ÷ sales for the previous 12 months) × 365). An increase could indicate a credit control issue.
Take precautions – consider taking out insurance to cover all trading with a large or doubtful customers or even against individual invoices.
Negotiate or re-negotiate credit terms with suppliers – Ask for early settlement discounts (if cash is available) and try to split annual costs into monthly payments. You will probably find this easier than paying a large bill at the end of the year. What would happen to your business if a supplier failed? Too much reliance on any one supplier could leave you extremely vulnerable. Use credit checks and find alternate source(s).
Review wages and salaries – In times where cash is tight, these (usually) monthly payments are strain on cashflow.
Consider invoice finance – These facilities can bring in a value of up to 90 per cent issued invoices – but it has a cost. It can assist as the cashflow income then grows in line with sales, and bridges the gap between issuing an invoice and receiving payment.
My thoughts and various other sources.
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