Managing cash flow is one of the most fundamentally important aspects of financial management for any business. Whilst controlling the amount of cash coming in and going out sounds straightforward, getting the balance wrong can put your entire operations at risk.
Nicola Roby, Director at CHW, explains some of the basics involved in cash flow management, and gives some tips for keeping your business cash rich.
Even if your business appears to be performing well, with good turnover and margins if you don’t have the funds in place to meet your liabilities on time you could be heading for trouble. Indeed a business is considered to be insolvent if it has insufficient assets to discharge its debts and liabilities
Generating an adequate income is an obvious requirement – if your business is not generating sufficient income from sales to cover overheads then your cash flow management is doomed.
It is all very well generating the income but if this isn’t being converted to cash in line with your credit terms you are exposing yourself to cash flow problems.
Further, you have to ensure that the payment terms you agree with customers fit with the schedule of outgoing payments which your business has to fulfill.
Don’t make the mistake of agreeing too lenient payment terms with your customers to encourage higher sales if this means that you will be unable to meet your own liabilities as they become due.
Whilst the business may appear to be performing well, if there is nothing in the account when it comes to paying suppliers and creditors this can quickly lead to insolvency.
This means keeping a handle on your costs, sticking to a budget and not letting your funds run dry unexpectedly.
Direct costs must be carefully controlled and constantly reviewed. Scrutinise your material and labour costs to ensure you are getting the best possible prices.
You could change suppliers to obtain better prices but the level of service you are receiving should be considered in conjunction with the cost.
Negotiate the best possible payment terms with your suppliers.
Business expenses should be kept to an absolute minimum and any additional overheads incurred should ideally be justified by an improvement to profits or efficiency.
Businesses should regularly review their gas, electricity, telephone and insurance costs for example. Even bank charges can often be reduced.
Whilst keeping costs to a minimum will obviously have an effect on cash flow, it is important to ensure you can make payments to suppliers and creditors on time.
Being able to pay suppliers and creditors of course depends on having sufficient funds coming into the business.
Cash flow is a business cycle like any other. Just as you would approach purchasing or production cycles in a planned, strategic way, cash flow must be treated the same.
As a business owner, you have to actively work to make sure you get the cash your company needs to meet its financial obligations on time. Negotiating and balancing pricing and payment terms with both customers and suppliers is a critical part of this.