Cash Flow is the Pulse of your Business

by Anne Feeley

Affordable Accounting Services

 Cash flow is the life-blood of every business. If you fail to have enough cash to pay your suppliers, creditors, or your employees, you’re out of business.

Cash flow is concerned with the timing of the movement of money. Inflows occur when you make a cash sale, collect from debtors, have investment income, or borrow money, etc. Outflows are generally the result of paying expenses such as wages, stock, taxes, purchasing fixed assets, etc. Cash Flow is not the same as “profit”, which is a snapshot of income and expenses at an event or over a certain period of time. You can make great profits, but if it’s all in accounts receivable, you have no cash to pay your daily expenses.

Four basic but important components to examine:

Accounts Payable & Cash Flow

Accounts payable and cash flow: Without payables and trade credit you'd have to pay for all goods and services at the time you purchase them. For optimum cash flow management, you'll need to examine your payables schedule.

Ensure you are purchasing at the best deal you can get. If you can’t get a better price, get better terms.

• Ensure you get appropriate discount for early payment.
• Only pay on the due date and not before.
• Review contracts to ensure you only pay for what you want/get.
• Negotiate volume discounts.
• Review supplier contracts on a regular basis.
• Aim to reduce the number of suppliers to leverage spend and prices.

Accounts Receivable & Cash Flow

The longer it takes for your customers to pay on their accounts receivable, the more negative your cash flows will be. Stay on top of your collection efforts.

•  Issue invoice straight away and ensure it is correct.
• Have the sales person do the collecting of cash.
• Link any bonus to cash collection.
• Review credit limits on a regular basis and reset based on current, not past, levels of business.
• Implement strict early payment discounts.
• As soon as credit period elapses have a regimented debt collection procedure in place.
• Initiate credit collection procedures before invoices become due.
• Trust your instincts. Sometimes it might be better to take less than 100% to get the cash rather than wait and/or never get the amount owed or go through expensive litigation.

Credit policy and terms form the blueprint you use when deciding to extend credit to a customer. The correct credit policy is necessary to ensure that your cash flow doesn't fall victim to a credit policy that is too strict or to one that is too generous.

Stocks & Cash Flow

An excessive amount of stock hurts your cash flow by using up money that could be used for other cash outflows.

•  Don’t order more unless absolutely necessary.
• Enter all stock on your system as soon as it is received to ensure full transparency.
• Identify slow moving stock and repack, re-price, re-use to generate cash.
• Renegotiate lead times from suppliers and reset minimum stock levels and order levels accordingly.
• Negotiate consignment stock from suppliers.
• Introduce/modify approval levels for stock purchases.
• Discontinue slow moving / loss making product ranges.
• Ensure ownership and accountability exists for every item of stock (i.e. stores manager)

VAT & Cash Flow

•  Ensure you claim any VAT re bad debts written off in your VAT return.
• Process supplier invoices as soon as they are received/issued.
• Consider timing of invoice issue at month end to optimise credit on VAT return.

Four tips on managing your cash flows:

1. Contingency plans. You should keep three plans at hand.

a. Cash flows requirements when business is going according to plans.

b. When business is slightly lagging.

c. When business is hit hard (such as during these economic times).

2. Cash Forecasting. Forecast, make a budget, stick to it. Modify your budget only after thorough ongoing reviews of your cash flows and remember to include expenses that may not be due each month, such as annual insurance premiums and taxes.

3. Spending Controls. Make sure you carefully negotiate leases and look for price quotes. Frequently analyse operations.

4. Add Employees cautiously. Actively seek ways to maximize your and your employee’s productivity. You may also want to remember to consider alternatives such as outsourcing.

Cash Flow is the lifeblood of every business. The concept is much broader than that of profit, alone. Close monitoring is critical to success. You must have a firm grasp on carefully monitoring and managing the cash-flow pulse of your business. For more information on Anne Feeley, Affordable Accounting Services see http://www.affordableaccounts.ie/  or call 071 9174132 / 087 9719606. See our Facebook page at http://www.facebook.com/pages/Affordable-Accounting-Services/167511786616146?v=wall