We know what is happening with our banking system and businesses both in the UK and abroad are having difficulties getting finance, and the bank is one of the main areas where we discuss our business cash flow issues. We do talk to our accountants, who should be more supportive and productive, I have found to be the opposite in many ways, I am not saying all accountants but there are a fair few that will only do the basics.i.e. VAT Returns, End of Year Accounts and possibly a bit of bookkepping – they appear to be more interested in the historical data rather than looking to support a company’s future growth
So who else do you turn too, Brokers, Consultants… ?
You need to discuss cash flow issues with experts, specialists in the field of Credit Management, after-all that is their core expertise. What businesses need, is sound guidance and a bit of hand holding when it comes to Cash Management, and accept that as business owners they cannot be expected to know everything. There are huge savings to be made internally, and this is where a business should be looking before they request financial support.
This is a serious flaw, and that is why so many companies fail, because they bury their heads in the sand or they leave this issue far too late and then expect someone to bail them out.
When I was working as a Group Credit Manager, I saw my role as Profit Manager, making sure the department worked to the agreed agenda, whilst looking at ways to save the company’s hard earned cash.
Cash Management is the core of a business, treat it with respect and it will pay you back ten fold. With that in mind, let’s take a look at Cash Management in greater detail.
Cash flow management is vital to the health of your business. The oft-used saying, ‘Revenue is vanity, profit is sanity; but cash is king`, remains sage advice for anyone managing company finances. To put it another way, most businesses can survive several periods of making a loss, but they can only run out of cash once.
The importance of cash flow is particularly pertinent at times when access to cash is difficult and expensive. A downturn creates extreme forms of both of these problems. When the `real economy’ slips into recession, businesses face the additional risk of customers running into financial difficulty and becoming unable to pay invoices – which, allied to a scarcity of cash from non-operational sources such as bank loans, can push a company over the edge. Even during buoyant economic conditions, cash flow management is an important discipline. Failure to monitor credit, assess working capital – the cash tied up in inventory and monies owed – or ensure cash is available for investment can hamper a company’s competitiveness or cause it to overtrade.
Cash flow is the life blood of all businesses and is the primary indicator of business health. It is generally acknowledged as the single most pressing concern of most small and medium-sized enterprises (SMEs), although even finance directors of the largest organisations emphasise the importance of cash. In this current economic climate, where access to liquidity is restricted, cash management becomes critical to survival.
In its simplest form, cash flow is the movement of money in and out of your business. It is not profit and loss, although trading clearly has an effect on cash flow. The effect of cash flow is real, immediate and, if mismanaged, totally unforgiving. Cash needs to be monitored, protected, controlled and put to work.
There are four principles regarding cash management:
Cash is not given. It is not the passive, inevitable outcome of your business endeavours. It does not arrive in your bank account willingly. Rather it has to be tracked, chased and captured. You need to control the process and there is always scope for improvement.
Cash management is as much an integral part of your business cycle as, for example, making and shipping products or preparing and providing detailed consultancy services.
Good cash flow management requires information. For example, you need:
Immediate access to data on:
Your customers’ creditworthiness
Your customers’ current track record on payments
Outstanding receipts
Your suppliers’ payment terms
Short-term cash demands
Short-term surpluses
Investment options
Current debt capacity and maturity of facilities
Longer-term projections.
You must be masterful. Managing cash flow is a skill and only a firm grip on the cash conversion process will yield results.
Professional cash management in business is not, unfortunately, always the norm. For example, one in three companies does not confirm their credit terms. Good cash management has a double benefit: it can help you to avoid the debilitating downside of cash crises; and it can grant you a commercial edge in all your transactions. For example, companies able to aggressively manage their inventory may require less working capital and be able to extend more competitive credit terms than their rivals.
Working Capital reflects the amount of cash tied up in the business’ trading assets. It is made up of three components:
Days Sales Outstanding (DSO, or `debtor days’) is an expression of the amount of cash you have tied up in unpaid invoices from customers. Most businesses offer credit in order to help customers manage their own cash flow cycle and that uncollected cash is a cost to the business. DSO = 365 x accounts receivable balance/annual sales.
Day’s payable outstanding (DPO or creditor days) tells you how you’re doing with suppliers. The aim here is a higher number. If your suppliers are effectively lending you money to buy their services, that’s cash you can use elsewhere in the business. DPO = 365 x accounts payable balance/annual cost of goods sold.
Finally, your days of inventory (DI). This tells you how much cash you have tied up in stock and raw materials. Like DSO, a lower number is better.
DI = 365 x inventory balance/annual sales.
Tighter business processes and better credit management are essential.
I will be writing more on this matter, but for the time being think about what I have said.