We often hear the phrase “cash is king” and in any business it is the life blood of the organisation.
Delays between getting paid and paying the bills can put severe stress on cash reserves. It is very true that most businesses fail due to lack of adequate cash flow even though they are otherwise viable and profitable. So what should you concentrate on in order to manage these risks on a day to day basis.
Eight Ways to maintain control over your cash flow
1) Prepare regular cash flow forecasts.
It is better to take action to avoid cash flow problems before they arise then when you are already onin the middle of them. Try and generate a cash flow plan. Monitor and amend it as new information becomes available. Take action in advance as soon as you anticipate any period of cash shortages.
2) Debtors
How long are your debtors taking to pay you? Remember every extra day taken represents vital cash which is tied up and being used by your customers for their cash flow requirement. If you notice the trend is upwards then you need to devote some time towards reigning in the slow payers. If you have a good relationship with your customers this may be just about taking the time to call them. If not you may need to use more robust solutions.
3) Creditors
Are you taking all the credit you are allowed without causing friction with vital suppliers and creditors? Most creditors will allow some days credit and it is usually acceptable to pay after this time. However bear in mind that your business depends on the goodwill of your suppliers. You should be careful not to introduce excessive delay in payment as if they loose confidence in your ability to pay they may react in an adverse way. Once this happens it can become difficult if not impossible to regain this trust again.
4) Inventory
How are you controlling your inventory levels? Are there slow moving lines which are soaking up vital cash resources? Again if you are holding more stock then you need, maybe you should think carefully about reducing it. It may be a policy to have all the relevant spare parts on hand and available. But how often will they be required and will you really loose the customer if you have to order in over a few days.
5) Relationship with your bank
Banks hate surprises. Keeping them in the dark will not help your case if you do indeed require additional finance. If they ask for certain information on a regular basis do be prepared to give it to them once you have received appropriate advice from your accountant. It is important that you maintain a good relationship with your lenders as you need them to be on your side.
6) Efficient invoicing
It never fails to amaze me how much of a cash can be caught up in un-billed Work In Progress. If the work is done then invoice!! If it is a large contract then stage payments should be agreed once critical milestones are reached. This can only lead to being paid quicker and better management of your cash resources.
7) Do not use the revenue as a lender of last resort.
Revenue can be relentless in chasing outstanding taxes and are weary of businesses showing signs of cash flow difficulties. If you are experiencing cash flow problems which result in the payment of taxes slipping it is vital that you engage in revenue and put a plan in place to clear any arrears.
8) Give careful consideration to how you purchase large assets.
Do not fund long term expenditure out of short term finance such as an overdraft. Give consideration to loan finance or leasing arrangements which may reduce the demands on your cash flow albeit with an acceptable level of cost.
If you need any further advice and information about any of the above do get in touch with us at info@irishaccounts.ie
The information contained in this blog is for general guidance on matters of interest only and should not be construed as professional advice or service.As such, it should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisers.