The Secrets of Good cash flow management

It is not just loss making and declining businesses that suffer cash flow problems. Your business may well be profitable but that does not mean that it is immune to cash flow pressures; whether it be due to legacy creditors built up from previous poor trading, large monthly loan repayments, seasonal dips in trading or a working capital requirement for growth.

Effectively managing your cash flow can be essential and following the steps outlined below will assist in achieving this:

  • Keep your records up to date, ideally having your cash position, your debtors (money owed to you) and your creditors (money that you owe) reconciled as early as possible at the end of each month. You can’t control your cash position effectively if you don’t know how much cash you have, who is due to pay you and who you owe money to.
  • All debtors should be sent a statement at the end of each month. In the current environment many businesses will not pay make payments unless they are chased several times. You should ensure that you follow up any late payers with regular phone calls and if payment is still not forthcoming, consider withdrawing supply and taking legal action.
  • Prepare a short term cash flow forecast (“STCFF”) at the beginning of each month. Ideally this should forecast out the next 13 weeks and as an absolute minimum the next month. This should show all of the receipts and payments that you expect to receive / pay each week (or day if this level of detail is required). This will identify any potential cash shortfall, allow you to decide which payments will have to be delayed and also identify any unnecessary outgoings.
  • If there is a cash shortfall contact creditors regarding payment plans. If you can’t afford to pay a creditor within terms it is better to approach them with a proposal, rather than putting your head in the sand and face them taking legal action or refusing supply. It is also essential that if you commit to a repayment plan that you stick to it, as once the trust is lost with a supplier, it is extremely difficult to regain it.
  • Try to keep supplier payment runs to a minimum, committing to only one or two per month. This will allow you more time to decide exactly which payments are essential and what you can afford to pay as the month progresses.
  • If possible avoid committing to Direct Debits with suppliers. Whilst this is convenient, it takes away the control from you as to how much and when you will pay a supplier.
  • Don’t be afraid to approach your bank. If you are carrying out the above steps your bank manager is far more likely to be sympathetic to a request for a short term increase in your facilities. There may also be some scope for any term loans to be restructured, freeing up further essential cash for the business.

Whilst there is some administration involved in implementing the above steps and producing a STCFF for the first time, this is something that can be done by your accounts staff with adequate training and, once a template is produced for the STCFF, the work involved on a monthly basis reduces significantly.

Please contact Nathan Oratis (noratis@consult.ie), Paul Keogh (pkeogh@consult.ie) or your usual Consultus contact if you would like to discuss this further.