How to Manage Your Cash Flow

There are some very clear signs to help you spot poor cash flow management. Do you often go overdrawn? Is your gearing level too high? Do you sometimes find it difficult to pay suppliers until your customers have paid you? If the answer to one or all of these questions is yes, you need to improve your cash flow management.

No business is safe from financial difficulties. You need to be aware of the weak spots, stay alert, identify problems and keep a close eye on them. Some of the most common issues that affect cash but are missed by businesses are:

• An increase in sales that can also cause a rise in your immediate costs, such as higher supplier costs or a higher salary bill – before you reap the reward of the sale. Budget for this.

• If stock levels are very high, you are locking up capital that can be a serious drain on your cash reserves.

• Keep your debtor days low. The differences between money owed to you and money spent on purchases can look healthy on paper, but if you don’t chase up debt effectively, it will create a hole in your cash flow.

• If your sales fall, you need to lower all associated costs quickly, such as salaries, utility bills and other overheads. You may need to make tough decisions in order to do this, but they will be decisions that may save your business.

The financial health of a business is usually measured by its accountant or, possibly, by a business adviser, who will determine your working capital (or net working capital) - the value of your assets minus current liabilities; and your working capital ratio - your working capital as a percentage of your sales.

• If your working capital is greater than your working capital ratio, you should have a positive cash flow.

• If your working capital is less than your working capital ratio, you do not have enough funds to finance your business and your cash flow management isn’t working.

Useful tip: Draw up a cash flow statement with your advisor or your accountant – this can be a simple excel spreadsheet. You will be able to work out inventory turnover, current debtors, trade creditors, etc and keep a close eye on money coming in and going out of the business.

Introduce good practice across the business

The main purpose of your business is, of course, to generate sales and make healthy margin from each sale. But you need to control customer risk if your cash flow is to be in the black over the long term.
You must be aware of the state of your cash flow. Even if on paper your finances are stable, be cautious and check cash flow regularly.

Rule 1: keep tight control of your inventory. Track exactly what stock you have available.

Rule 2: check all your existing contracts and your terms and conditions, and renegotiate them where you can. You may be able to get much better terms with both your suppliers and your customers, which will help you get paid quicker and pay suppliers later.

Rule 3: ask to pay on account when you place orders. If you are dealing with a new customer, run a credit check to make sure it is solvent.

Rule 4: honour your undertakings. This means meeting agreed deadlines, checking the quality of the products or services you sell, delivering on time and in good order. You are much more likely to be able to keep good terms with customers who are satisfied with your relationship, service and products. Disputes, sometimes quite trivial, are the cause of one in three unpaid debts. Don’t give your customers cause to complain!

Rule 5: invoice quickly and demand prompt payment. Learn to negotiate effectively.

Rule 6: put on hold or renegotiate orders from customers who are slow to pay. If one of them wants its order as quickly as possible, agree to deliver if they pay the outstanding amount, even if it is in instalments.