09/06/2008

A healthy positive cash flow is essential for a successful business. There is an old maxim which says that ‘cash is king’. This is especially true for smaller businesses with limited access to finance. Your customer care may be world class, your products can be top notch, but if you can’t pay your suppliers, you’re out of business. 

The first thing to remember is that profit is not the same as cash. Your accounts can show a healthy profit but you can still suffer from cash shortages from time to time through the year. So, cash flow management is a vital component in making sure your business stays healthy. However, cash flow management is more than just checking your bank statement to see what’s come in and what’s gone out. 

Analyse your cash flow, and the elements that make it up.  You can do this on a fairly simple spreadsheet. When do your customers pay you? If you issue an invoice today, how quickly will your customer pay? Immediately? In thirty days?  In sixty? Put details into your spreadsheet.

How often do you need to pay your suppliers? Do you have fixed costs – a bank loan which needs to be paid on a set day each month? Lease payments, rent or rates? Put these costs into your cash flow.

Are there significant seasonal variations in either your income or expenditure? Does business die in December or over the summer? Factor these into your cash flow.

Analysing these elements of cash flow will show you where you might experience gaps and allow you to plan for managing them by; for example, obtaining a short-term overdraft or extension of your bank facility. 

You can also find you have a cash surplus from time to time.  Make sure you use this effectively. Most banks offer you a facility to manage your accounts online. Transfer any surplus to an interest-bearing account until it’s needed.

Consider the terms you offer your customers. Are you too generous? Normal payment terms are 30 days but some suppliers are demanding payment in 14. Can you accelerate payment? You might consider offering a discount for early settlement. 

On the other side, are you too quick to pay your debts? If you’re offered 30 day terms, make use of them. Pay when you have to, not before.

Stock control is also important. If your business needs stock, make sure you don’t carry more than you need. Excessive inventory ties up cash that could be more usefully employed elsewhere.

Effective credit control is another key component of cash management. There’s no use spending time and effort in winning a contract if you’re not going to get paid, or you’re going to have to wait months for payment. Check out your customer.

If you don’t have a credit controller, you can access useful information about limited companies online. Google ‘company search’ or ‘credit check’ – you’ll get a useful list to choose from. You can get reports from as little as £5 which will tell you whether your customer is a good risk or whether they have a history of unpaid bills. 

If you’re too late to do this, and you have a customer who is not paying, there are people who can help, including us at MLM Insolvency, for information about our debt recovery services.


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