What’s the key to sound cash flow management?

“Grim cash flow problems cause the demise of companies, even those with strong sales and abundance of customers,” warns Oak business consultants. As experienced Business Advisors, we can help our clients to keep their cash flows well managed.

Cash flow problems can arise for many reasons. A list of some of the causes is stated below:

• failure to maximize sales,
• low margins,
• being too lenient with credit, and
• poor cost controls.

Businesses often purchase redundant inventory. Also, negotiation with suppliers has always been a weak point of many businesses, yet they stick with the same instead of searching for a better value for money.

Risk 

Many businesses aren’t very good at credit control. Some don’t have systems that tell them when payment is overdue. Others fall short when chasing payment – often because they fear losing customers. Time is another issue.

Typically, micro-business or start-up owners have inadequate time for cost and credit management, because they have to manage so many additional tasks, and most of them can’t even afford to hire someone for this. But, if cash is not received before you need to pay, soon the business may terminate.

Therefore, the importance of effective cash flow administration can’t be over-emphasized. These must be known at all times:

• cash available in the bank,
• how much you’re owed, and
• how much is payable.

A cash flow forecast is an absolute necessity. It allows you to match your likely expenses and revenues to figure out periods in the future when cash deficit can occur. If so, the company can act accordingly to avoid serious issues.

Profit and costs

Maximizing sales and margins is vital. A market analysis can tell the business how much it can charge. Adding too much margin may lead your customers away. But if your margins are+n’t adequate then reducing costs is the only option.

Cost regulation is necessary. Unregulated expenses will weaken your cash flow, and the company would waste money in all the areas like:

• Cost of premises,
• Insurance and energy costs,
• Wages,
• Stock and materials,
• Marketing, and
• Professional services, etc.

Since it is possible to make savings in most areas, often the company just needs to analyze options.

Simply asking the current suppliers, how they can provide better value can result in cost savings. The company should evaluate costs periodically, at least every quarter, if not every month.

In the end, any expense should not be authorized without having a sound business reason. 

Credit matters

Asking your suppliers for favourable credit terms is also recommendable. The longer cash stays in the company’s bank account, the better – although the company might get early payment discounts. Some companies struggle with negotiations. But nothing gets done without effort.

The following course of action is recommendable:

1. Credit-check must be made compulsory before extending the credit facility to any new client,
2. The company may ask Feedback from customer’s other supplies as recommendations,
3. Consider the cash on delivery terms or part payment terms until a long relationship is established,
4. In case the company decides to extend the credit limit to a new customer, then remain cautious and keep it low,
5. Make sure to arrange for a formal Agreement of terms, and
6. Prioritize invoicing to new customers,
7. Send a reminder to the customer shortly before the invoice is due,
8. On non-payment by the due date, waste no time and promptly make contact,
9. Remain polite, but keep focused on the payment ASAP, and
10. Never refrain from asking again and again about the money owed to your company.

A summary of tips for Cash Flow Management;

• Keep reviewing your costs – you must limit your spending,
• Pursue the best value from the suppliers. Don’t close all the other options,
• Prepare cash-flow forecast – it can protect you from trouble,
• New customers must undergo a credit check. Keep credit limits low,
• Send invoices on priority and remind them of payment shortly before its due,
• Outsourcing credit control is also optional,
• Ask a professional, if you are constantly having cash-flow issues.

We do offer customized Cash-Flow models. If you require our service to craft your Cash-Flow statements and financial model, feel free to contact us at [email protected] or website: www.oakbusinessconsultant.com and visit the page Financial Modeling.