What is cash flow management?
Good cash flow management allows you pay suppliers on time, buy stock, keep operations running smoothly, and invest in your business. It is a good indicator of financial health and can be the difference between growing and surviving. Here are some tips to help you improve your cash flow:
Calculate cash flow statement and forecast
Perform a cash flow analysis to identify costs (what are the costs, how much are they) and income. Look to various financial statements to build a complete view.
Sales Forecast: Sales forecasts help you understand the cash you are likely to see in your business over the coming months. They are similar to targets, but they should be as realistic as possible.
Profit and Loss: You should also look at the profit and loss statement and the balance sheet. This will help to assess the current and future health of the business.
Balance sheet: Certain balance sheet items could help build long-term stability (and during challenging times turning non-cash assets into cash is critical).
The cash flow statement should help to identify cash flow from operating activities, cash flow from investing activities and cash flow from financing activities. There are many good software programs available in Ireland to help track this on an ongoing basis.
Negotiate good supplier terms
It is common in business to business (B2B) transactions that work is already in progress and you may not be paid until a couple of months down the line. Your supplier sends invoices for work due and then your client pays your invoice within a certain time frame (e.g. 30 or 60 days).
It is important therefore to talk to your suppliers and negotiate the longest payment period possible.
Minimise the time between (i) when you pay and (ii) the time your customers pay you.
Implement good credit control procedures with customers
Ensure payment terms are as short (as reasonably practicable). Ensure terms are properly communicated to your customers both in your paperwork and in sales interactions.
If invoices become overdue, keep close contact with customers.
It is good to remember – it does not matter how good you are at sales, if you aren’t getting cash in, you may need to seek loans to pay your suppliers, which will incur interest.
Implement tight stock control measures
When cash is tied up in stock which cannot be shifted efficiently, it can cause problems.
Aim to strike the right balance between (i) getting stock in on time and at the right price while (ii) avoiding having cash tied up in stock unnecessarily.
Control spending
You should control costs through all business cycles, including when things are going well, to help you more effectively manage your cash flow.
This applies to all aspects of your business including buying equipment and other expenses.
Spot warning signs
There will be signs in your financial reports and elsewhere that can indicate potential future cash flow problems.
Currency exchange rates, extreme weather, government policy, and more can all also have an impact on cash flow. Aim to be aware of these warning signs and stay updated on economics where possible.
Take time to step back and review
Are there areas of your business which are underperforming or costs that have dramatically increased? Do you understand the trends your business currently faces? You can be so focused on sales that it can be hard to find time for this.
You should look at assets with the lens of how they generate cash. Spending cash on slow-yield items will not help your business grow or be able to meet its current obligations.
These hygiene factors will help to keep your business in good financial health. However, in times of crisis or poor cash flow, there are various options available – both from financial institutions and government bodies. For more details about funding options available during the current Covid-19 pandemic, please see our article
HOW CAN LALOR & COMPANY PROVIDE HELP YOU?
With over 30 years’ experience advising on liquidity, cash flow and debt issues, we are well placed to advise you on the best options available. We have extensive experience dealing with banks and other credit institutions and can help navigate your business through these challenging times.