Put cash at heart of business

1 “Your revenue and overall profit and loss might look good but if your cashflow is not healthy it will be difficult to survive,” says Stefan Spohr, the partner in charge of UK and Ireland at BearingPoint, the management consultancy. All employees need to understand this. “Change the way the front office and sales teams are incentivised so that not only do you measure by the sales targets but by day sales outstanding and how quickly those invoices are paid,” he says.

Know your risks

2 This is always important but takes on particular relevance in the current climate. “We are seeing a continuous increase in levels of insolvencies and administrations,” says Andrew Ashby, an associate partner at KPMG, the professional services firm. Ensure that any relevant information picked up by sales or other staff is filtered back to credit control. “If you have concerns, have a conversation and tighten the credit limit. Don’t let it drag on,” says Mr Ashby.

Know who owes what, when

3 “One of the most important things is visibility and transparency of cash,” says David Vaughan, a vice-president at Celerant Consulting. Without this you can be caught out or surprised by events that you should have forecast, such as a large supplier payment coming. “Typically businesses have good profit and loss control but only a few have good [weekly] cashflow reporting that builds in forecasting, looking 13 weeks ahead,” he says.

Take control

4 One of the first things that KPMG does when entering a struggling business is take control of the cheque book so that one person is in charge of who gets paid and when. “And if it’s a multinational, we repatriate all the cash that’s in funds around the world back to the centre,” says Mr Ashby.

Get invoices right

5 Issue invoices as soon as they become due and ensure that all the details — addresses, reference numbers and so forth — are correct. Basic errors can slow payments by days or even weeks. “Multiplied across a number of invoices it can make a huge difference,” says Mr Spohr.

Manage stock levels

6 Keeping too much stock on hand ties up cash unnecessarily. Negotiate shorter lead times with suppliers and ensure that your own manufacturing processes are lean, says Mr Vaughan. Automate where possible; receiving and entering orders manually slows things down, says Mr Spohr. Check, however, that automated systems do not re-order stock unnecessarily, adds Mr Vaughan.

Monitor customers

7 Agree payment terms and ensure that customers stick to them. Try to get them to agree to direct debit or electronic payments. Good customers can be offered good terms but others need to be given much more limited credit.

If customers don’t pay on time, get in touch within a week to ask why, says Trevor Jones, a founding partner at Advantage Capital, a private equity firm. “If the customer won’t pay you, you have to cut them off — don’t let them buy anything more until they pay you for the last order.”

And don’t let big names blind you, says Edward Rimmer, the UK and Ireland chief executive of Bibby Financial Services. “Sometimes people just assume that when the goods are delivered they will get paid,” he says. “This is particularly an issue now when big companies are using the traditional method of managing cashflow, which is paying people later.”

Negotiate with suppliers

8 “Never forget that you are a customer and you are valuable, so you have a negotiating position,” says Mr Jones. “Try to extract as much credit as you can by agreement.”

Once you have agreed terms, honour them, but don’t pay any earlier than necessary, says Mr Ashby. Check that all invoices are coded correctly when they are received; in one company he visited at least 50 per cent were paid early because the details were incorrectly entered into the payment system.

And watch out for suppliers pre-dating invoices. “People play games when times get tough and if you are not aware of these things you will end up being burnt,” he says.

Investigate outsourcing

9 Your prime objective should be to reduce fixed costs, says Mr Spohr. You can do this by looking for deals that allow you to pay according to how much you use the service, rather than tying you into fixed contracts, and outsourcing.

Sort out financing arrangements

10 Debt factoring and invoice discounting — essentially selling the business’s invoices to a third company — can provide cash quickly and, depending on the deal, protect you against bad debts. L

ook for industry-specific deals and ensure that you scrutinise the small print, says Mr Rimmer. “Cashflow finance isn’t something that will run itself,” he adds.

Be prepared to take a significant hit to your profit margin; such tactics are generally used to gain time while negotiating other solutions such as an extended bank finance facility, says Mr Ashby.

It may also be the time to consider changing banks, says Mr Spohr. “Not every bank looks at things in the same way . . . some are very conservative, some more open.”

Explore Management

• MBA