But When Will We Get Paid? – Effective cash management

There has been lots of publicity about payments for products or services being delayed by customers and as a consequence causing problems for businesses.

Whilst this is an unfortunate state of affairs there is no need for it to be a surprise and adversely affect a business provided cash is managed effectively and there is some realism to cash flow forecasting. Of course not all businesses do a cash flow forecast!

For most businesses their financial objectives include:

• Earn a satisfactory rate of return on capital employed
• Better management of working capital, bank borrowings etc
• Achieve productivity targets e.g. labour ratio to total costs

In achieving these objectives cash flow forecasting is key. Don’t forget customers will generally pay their invoices at a particular time each month as you will do with your suppliers. Get to know the customer who only pays an invoice when a supplier shouts or chases – behave accordingly. Understand somebody in your business needs to be responsible for collecting cash - ensure they are aware of any special relationships and ask for help if they should need it. Don’t forget working capital.

We would recommend having cash flow forecasts for:

• Long-term or strategic – 3 years
• Annual – by month
• Short-term – 3 month / daily

Long-term forecasts support strategic planning, determines equity funding or similar, estimates required borrowings.
Annual forecasts indicate peak cash requirement, min/max headroom facility, mid month variation, capital expenditure requirement, debtor creditor stock calculations, supports over draft requests.
Short-term forecasts (most important in today’s climate) determine daily peak requirement, creditor payment planning, cleared versus uncleared funds, short-term investment of surplus, daily sales and cash received patterns.

If you plan and manage your businesses cash then you will need to:

• Identify seasonal cycles
• Take advantage of settlement discounts
• Be able to plan for capital expenditure
• Identify future funding and borrowing needs
• Assess impact of start up losses
• Impress potential investors and lenders

Don’t forget:
“If you fail to plan then you’re planning to fail”

It applies to finances as much as operational issues.

Also
“If you look after the pennies the pounds will look after themselves”

You may also find some useful tips in our Credit Crunch article. If you need any help getting a good handle on the above contact Trevor or John at EMS.