10 Hot Tips to Manage Cash Flow & Credit

MEAD PARTNERS provide ten simple points on managing cash flow and credit in both the good times and the bad – as presented at the Members General Meeting at Bendigo.

WHILE we are continually being told that the GFC is over and the economy is growing at a steady pace most business are yet to have the pressure taken off them due to increased cost of funds from rising interest rates and pressure continually placed on them by tight cash flows. Here are some handy hints on how to manage cash flow and credit.

Profit vs. Cash flow

It is commonly assumed that profit is the measure of a business’s success; unfortunately this is not 100% true. To manage your cash flow, understanding the various reports that are available is paramount. While the Profit & Loss report will show total sales and expenses, it will not show whether you are cash positive or negative. To see the cash inflows and outflows, look at the Statement of Cash Flows, or, if one isn’t being prepared, a summary of the bank statements or even the bank reconciliation should suffice.

However, those reports will only show what has happened. To be successful you need to know what is going to happen and plan for it with cash flow forecasts.

Cash Flow forecasts – “Plan ahead”

A cash-flow forecast is a key tool for your business. It will allow you to better understand where your money is being spent, when you have cash surplus or deficit.

Unfortunately some businesses don’t prepare a forecast because it can be hard to gauge the effect different factors will have on cash-fl ow events. Th e important thing is to just start doing it – with experience you will be able to prepare more accurate forecasts.

Three tips for putting together a solid cash-flow forecast:

• Keep it simple: Focus on items that affect your cash-flow most heavily and add extras if required. The more complex it is, the more likely errors are to occur.
• Standardize: Ensure procedures for collecting and reporting cash-flows are consistent across the business. This will help you to model the inflows and outflows and understand where your cash is going each month.
• Measure your accuracy: Determine any variances in the forecast you are prepared to accept. Where the variances are exceeded, investigate the reasons and consider if changes are needed for next month’s forecast.

Capital Investment and Growth

Cash-flow management is imperative during economic downtimes, but periods of rapid growth, can present equally difficult challenges. Growth must be managed with things like capital investment and man power due to the inevitable delay of increased cash inflows. It is this delay that can cause growth pains for a business.

Cash-flow forecasting can reduce these growth pains by highlighting when increased cash outflows will occur and talking to your bank will hopefully provide you the extra cash that is required. Estimating the business’ future Working Capital will give you an idea of how much additional cash will be used to fund the growth and where the additional funds are tied up.

Debtor & Creditor Management

Debtor and creditor management is a management problem for many businesses: people just don’t call customers to chase money and on the other side of the fence creditors are becoming more demanding.

Maintaining a term of trade is essential for cash flow management as it is ensures your ability to pay creditors when they fall due.

Debtors:

• Constantly monitor the debtors ledger for slow payers.
• Chase up overdue accounts and follow up on customers’ promised actions
• When chasing slow payers, make sure you get a firm commitment date for payment, even if the payment is in two or three installments.
• Don’t feel bad about chasing customers for payments, you have provided a service and now they must provide payment.

Creditors:

• Where possible, try and negotiate creditor terms that are similar to your debtor terms to match cash inflows and outflows.
• Don’t just ignore creditor’s calls, they will be less likely to grant additional time to pay and more likely to send a letter from their solicitor.
• Don’t fall in to the trap of COD for creditors but then have terms for debtors – it just can’t work.

Preventing Bad Debts

Bad debts are all too common nowadays and therefore debtors must be reviewed to ensure that your money is not at risk. By having up to date credit checks on all customers, higher risk customers can have their credit terms reduced or suspended before it is too late.

In addition to this, look out for some of the warning signs of an approaching bad debt:

• Your calls are not being returned
• Promises to pay not being honored or payments being returned
• Excuses and complaints regarding supplies that appear to have no basis

Reliance on particular customers

While big customers have their obvious benefits, some businesses will spend too much time servicing that customer so that they don’t have time (or don’t think it necessary) to develop new business.

Unfortunately when one or two major customers make up the majority of your income, losing one of them can be devastating to the cash flow and the business as a whole. To prevent this from occurring, a good spread of customers – small, medium and large – should be the aim.

This will mean that if a larger customer does leave, the smaller and medium customers will be able to support the business while you get new customers to fill the gap.

Manage Statutory Payments

When Cash is tight statutory payments (BAS, Superannuation, Income Tax etc) are the ones that usually get left to last. While the ATO does not look favourably upon this, they do understand that sometimes cash is short.

You can negotiate payment terms with the ATO so long as all future BASs/Tax Returns are lodged and paid on time.

Stock Management

Stock management is also a very useful tool to help cash fl ow because stock is effectively cash sitting on the ground. If it takes 45 days to sell and another 45 days to receive payment then you are 90 days behind whilst you have had to pay your wages and fuel to produce that product. Review your stock turnover in days to gauge if you are over producing.

Excess Plant & Equipment

A quick way of freeing up some cash flow is reviewing your asset registers and selling excess plant and equipment. Not only will you receive the cash from the sale, if the equipment is under finance you will also save the monthly repayments going forward.

Some things to consider when selling plant and equipment are:

• If the asset is under finance, make sure you will get enough money to pay out the financier otherwise you will have to make up the difference.
• While in the short term the sale will generate cash, don’t forget that tax will have to be paid on any profit.
• While an asset may be underutilized now, if you’re expecting to need it again soon perhaps it can be rented out in the short term instead

Good Management

Good management is the key to survive in the bad times and will make your business even stronger in the good times. Sometimes this means making decisions that you would rather not make, and sometimes it means listening to advice or news that you would rather not hear.

In the long run these things are necessary in order to keep the business going and if these decisions are made and advice listened to, the good times will greatly outweigh the bad.

Surround yourself with the best people that you can find, whether it be your accountant, bookkeeper or business manager and make sure that they are providing you with the information that you require to ensure that you can make sound business decisions in a timely manner.

Mead Partners presentation can be viewed at www.cmpavic.asn.au

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