Building a Cash Management Culture

Do you manage cashflow or do you just rely on being careful?  Do you have a formal strategy for improving cash flow?  Do you have a cash management culture?

These were questions posed to members of the Business Exposure Group at their recent meeting.

82% of business failures are as a result of poor cash management.  60% of businesses have inadequate cash flow.  In many industries cash is difficult to access which creates problems for you to remain competitive, maintain financial stability and pursue growth.

But, how do you encourage a cash flow discipline in both good and difficult trading times.  Do you link compensation to achieving specific cash flow targets?

During the meeting our members came up with the following points:

Use email to send invoices rather than post, this should speed up billing and collection.

Reduce error rate on invoices.

Don’t wait to invoice at the end of the month, and have a regular schedule to follow up on all collections

Ask for a deposit or milestone payment.

Incentivise customers to pay faster by offering discounts.

Exhaust current stock and delay expenses.

Request better supplier payment terms.

Finance purchase orders.

Sell or lease idle equipment

Turndown or postpone work

Don’t pay early, pay electronically and on the last day the payment is due.

Sometimes more flexible payment terms can improve your cashflow more than a bargain basement price, so don’t always focus on the lowest price when choosing suppliers.

Arrange a line of credit from the bank, even though you don’t need it immediately.

Ask suppliers for extended payment terms.

Ask you best customers to accelerate payment.

Offer clients fixed rate retainer packages for some of the work, this way you get paid up front.

Suggest payment by monthly direct debit, instead of by cheque.

Offer finance as part of your product package to ensure that you get paid on time.

Operate a ‘just in time delivery’ to eliminate dead stock.

Offer discounts on lower demand products.

Source items from low cost countries, but beware you may need to pay upfront and buy in large volumes, so it may be false economy.

The popularity of financial software has made cash management easier, but as difficult as it is for business owners to prepare projections it is one of the most important things that have to be done.  But, does an educated 3 month cashflow forecast work in reality, and should you continually review your projections? All members agreed that you should have a line by line projection for every significant outlay in the month.

A further problem is managing cashflow in a seasonal business which is never easy.  You need to clearly identify the highs and lows of the yearly cycle and be confident that your projections are realistic.

One of our members commented:-

‘To our surprise we were called by our bank for a meeting shortly after we filed our annual accounts.  We were seen as high risk, despite being profitable, having sales growth and cash in the bank.  We were told that we would have to pay higher interest rates and would have restricted access to funding.  The problem was inadequate cashflow.  So, we reduced debtor days by 5 days (75 to 70) and inventory by 15 days, which improved our negative cash position by 60% and restored our relationship with the bank’.

This subject created a lot of debate amongst members of the Business Exposure Group and they went away with additional ideas of how to improve the cash management in their businesses.

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