Cash, as the old adage goes, is king, and nowhere is that more true than for
the day-to-day operations of a business. Managing cash flow is a crucial
part of business life but, sadly, it is also an inevitability that there
will come a point when it just ebbs away.
Mike Cherry, chairman of financial affairs at the Federation for Small
Business, explains: “It doesn’t matter what else you do in business, but you
should never lose track of cash. Cash flow should be aligned with the
business forecast, with a spreadsheet that details all the money coming in
and going out.
“Keep up to date with collections. Don’t start looking at the situation a week
ahead of payment date; it is absolutely crucial to keep plenty of money in
the bank to meet commitments.”
But, Cherry adds: “It doesn’t matter how well you prepare, every business will
face a cash flow crisis at some point.”
Indeed, Cherry knows this from personal experience. An administrative error on
the part of a client meant that the manufacturing business he runs in
Staffordshire was not paid a significant sum for five months. “You can’t
forecast for an event like that, but the day-to-day bills, such as rates and
wages, still have to be paid,” says Cherry. “That is why it is vital to have
a good working relationship with your bank and to keep them fully informed.”
Peter Spivack, owner of Merseyside-based restaurant Rendezvous, prepared his
first year’s cash flow forecast as part of his business plan.
“I decided early on that I would review the forecast monthly, although I
update the figures on a weekly basis to keep on top of things,” he explains.
“The forecast has enabled me to spot looming cash imbalances on three
occasions. I didn’t panic because I could see the problem was temporary; I
used a pre-arranged overdraft facility to tide us over.”
Experts say there are several basic rules businesses should follow to minimise
disruptions to the cash flow cycle. The first is to make sure that the terms
and conditions of all contracts are clearly stipulated to counterparts, and
that due care is also paid to their small print.
“Too often, a business sends a quote to a client with its terms and conditions
clearly stated, and the order comes back with different terms and
conditions,” explains Clive Lewis, head of SME issues for the Association of
Chartered Accountants. “Nobody is quite sure which set actually applies. It
is vital to raise the matter at the onset, and explicitly agree on the terms
and conditions.”
It is also important to make sure that the paperwork is in order, from the
correct delivery address to the exact person in the accounts department who
handles invoices. This is critical when dealing with big organisations,
where several signatures may be needed or where there are many delivery
depots. Invoices should also be sent promptly.
Lewis also recommends using sales staff and other employees as “the eyes and
ears” of a business. “Ask them to keep you informed of any problems with
customers,” he suggests. “If they notice that stock is remaining on shelves
longer, that can be the first sign of future trouble. Encourage staff to
tell you about these things. Cash flow is all about being in first. There is
no point noticing that a customer is in difficulties after everybody else
has, and finding your business in the back of the payment queue.”
Advisers also recommend that small businesses should not get carried away with
the euphoria of an order from a major company, who are often slow paying
suppliers, but instead consider the situation objectively. “A businessman
must always ask himself if he can afford to take the order,” explains Lewis.
“If the client has extended payment terms but it is necessary to take on
staff to fulfil the order, then look at the finances and whether it is
possible to make savings.” If it costs too much to complete an order or puts
a business in jeopardy fulfilling it, then turn it down.
“Some bigger companies will only take electronic invoices,” adds Lewis. “There
is a cost involved in that, and it is vital to know that from the outset.”
The website, paymentleague.com, lists the average number of days that it takes
UK plcs to pay their invoices; a handful take more than 200 days. It is also
well known that when private equity companies take over business, often one
of their first acts is to review and amend payment terms of the target – to
the detriment of suppliers. After all, the faster a company collects debts
from customers and the slower it pays suppliers, the better the cash flow.
But companies who gain a reputation for playing this time delay can lose
orders, causing major disruptions to cash flow.
For retailers, for example, it may be better to improve cash flow by adjusting
gross margins. It might be possible to increase the selling price of an
item, generating additional cash flow, or to cut back on products with poor
gross margins. Monitoring stock levels and sales carefully will cut back on
the need for discounting.
Many small businesses fail to run credit checks on their suppliers or clients,
which advisers believe is a foolish economy. Agencies such as Dun &
Bradstreet, Experian and Equifax charge a nominal fee of around £30 per
credit check, which could actually save thousands of pounds.
“Companies should constantly check cash flow against business plans and
forecasts,” adds Lewis. “It may sound tedious but it will pay dividends.”
