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Directors’ Briefing Finance

Managing
your cashflow

A business can survive for a short time their borrowing limits quickly. Alternative
without sales or profits, but not without methods of funding allow you to raise more
cash. It is cash which pays the bills and finance (see 7).
allows trading to continue. And if you are
growing, and extending credit to more 1.3 The main outflow of cash is the money
customers, the need for cash is greater. used for expenditure, including paying for
your overheads.
This briefing explains:
• Salaries are often the largest and most
• The main components of cashflow. inflexible cost.
• How to forecast and control cashflow. • Other major costs might include stock, raw
• Tactics for generating more cash. materials and any capital expenditure.
• Tips on using the right types of finance • Many businesses have to fund large
for your needs. amounts of work-in-progress.
For example, a design agency might spend
six months on a project before the client is
1 Components of cashflow prepared to be invoiced. In the meantime,
the agency has to pay for all the materials
Your cashflow is the balance of all the money and labour that go into the job.
which flows into, and out of, your business
each day. Cashflow is the actual payments of
money, as opposed to what is owed by your
debtors or to your creditors.

There are five main components of cashflow.

1.1 The main inflow of cash is usually the cash


from sales.

• If you sell on credit, your cash inflow is


delayed until you are actually paid. Effective
credit control is essential (see 5).
• A business which purchases on credit and
is paid in cash, such as a retailer, is at a
great advantage in cashflow terms.

1.2 New finance provides a one-off boost to


your cashflow.

• In the past, most businesses have relied on


bank overdraft finance and have reached

England Updated 01/02/09


Directors’ Briefing 2

1.4 VAT and tax are regular cash outflows that payroll.
tend to be paid out in large lumps. You can Make sure you will have sufficient cash
be penalised heavily for late payments. on the day, to cover each payment.

• Buying significant items just before a VAT • The key is to be realistic. For your regular
period ends, rather than at the start of the sales, use the established figures for sales
next one, can help your cashflow. volumes, debtor periods and bad debts.
For any new products or customers, be
1.5 Your business needs to give its owners and pessimistic — expect problems and delays,
financiers a return on their investment. and do not book a sale until the customer
has paid the invoice.


• You must pay interest — and repay capital
— to lenders such as the bank. • Be aware that monthly forecasts do not
• If there is spare cash, you — and other take into account weekly fluctuations. Preparing, and
shareholders — may want to draw back regularly updating,
any personal loans made to the business. 2.4 Include key indicators that give a picture a cashflow budget
of the health (and prospects) of your is one of the
The cashflow generation of your business may business. most important
be limited by what industry you are in. But to management tools
a large extent it depends on how well you run • For example, the volume and status of that you can use
your business (see 2–6). sales leads and the volume of orders. in your business.
It is vital to know
2.5 Include the budgets and forecasts in the how much cash
2 Cashflow forecasting management accounts which you regularly is coming in and
send to the bank. going out, and
The more warning you have of cashflow peaks this is where most
and troughs, the more time you have to deal • A bank which trusts your forecasts will be businesses fail.
with them. more prepared to extend your borrowing Knowing what
facility when you need extra finance. problems you may
2.1 Accounting software makes it easier Consider meeting with your bank on a have ahead of you
to prepare budgets and revenue and regular basis, so they are aware of your enables you to
expenditure forecasts for the months and financial situation.


prepare for this and
years ahead. avoid running out
of cash.
• You can quickly update your projections 3 Using the forecasts Martin Dunne,
and make ‘what if’ calculations. For Sayers
example, what if sales are 20 per cent 3.1 Monitor your actual performance against Butterworth
below forecast for six months in a row? the budget and the cashflow forecast
• For maximum flexibility and ease of use, regularly — at least once a month. Identify
you can use special forecasting software. any problems and take immediate action.
• You could use graphics to make it easy to
detect patterns and step changes. • For example, if you know you will be short
of cash in three months’ time, you might
2.2 Prepare budgets showing the level of sales reduce stocks, slow down sales growth,
and profits you expect to achieve, and the or agree extended credit from a major
costs involved in doing so. supplier for that period.
• The only way to generate cash over the
• Estimate the sales and margins, based on long term is through retained profits.
past experience. Don't be too optimistic in By comparing your performance with the
your forecasts, or you risk losing credibility. budget, you can quickly judge whether
Overheads such as rent can be accurately sales and profits are going to plan.
predicted.
3.2 Before taking on any large financial
2.3 Prepare monthly (or weekly) cashflow commitment, including major new orders,
forecasts, looking ahead one year, check that you will have sufficient cashflow
updated monthly. (or other finance) to pay the costs involved.
These forecasts show what cash you
expect to come in, and when (if at all) you • Create a useful yardstick by calculating how
expect to run into problems. much extra working capital is required to
fund each 10 per cent increase in sales.
• Identify the major outgoings, especially • Restrict the growth of your business to
those on fixed dates, such as the monthly whatever you can comfortably afford to
Directors’ Briefing 3

finance. Always keep a financial reserve 4 Sales and marketing


available for contingencies.
4.1 Today’s sales are tomorrow’s cashflow, so
3.3 Develop red light systems to warn you your overall aim is to keep increasing sales
automatically if something needs querying. and profitability.

• Your sales manager must let you know as • Increasing prices may reduce sales (and
early as possible if leads, orders, or sales, therefore cashflow) in the short term.
fall below a certain threshold, or if planned But this can be outweighed by its major
sales are delayed or a substantial customer positive impact on profitability and cash
stops buying from you. generation over the longer term.
• Your financial controller should warn you
if key indicators such as profit margins, 4.2 Even profitable companies can — and do
liquidity ratios and stock ratios deteriorate — become insolvent through overtrading.
beyond an agreed limit. This happens when you have to pay the
You also need to know about any costs you incurred fulfilling an order before
substantial invoices which are in dispute, you receive payment from your customer.
particularly late debts and customers
exceeding their credit limits. • To avoid this risk, you may need to delay
some orders and decline others. (See 3.2.)
Build productive relationships with your key
suppliers, so they are prepared to extend extra 4.3 When negotiating contracts with
credit to you when you need it. customers, make generating cashflow
one of your primary objectives.
For businesses struggling with cashflow during
the current economic downturn, HM Revenue • You may be suprised at how easy it is to
& Customs (HMRC) have lauched a dedicated obtain deposits.
Business Payment Support Service (Tel 0845 • Negotiate stage payments for contracts


302 1435, Mon-Fri 8am to 8pm, Sat and Sun which will take time to complete.
8am-4pm). Include a timetable for the customer to pay
invoices as part of this agreement. Cashflow
If you're worried about being able to meet tax, • Agree a clear specification for the work to forecasts are the
National Insuance or VAT payments, HMRC be completed, to minimise the chance of responsibility of
staff can review your circumstances and the customer disputing any invoices. the whole board
discuss temporary measures such as arranging not just your
for payments to be made over a longer period. 4.4 Improve your sales and profit margins by accountant. Be
making sure all your work is invoiced for as warned, profitable
soon as possible.


companies can,
No profits and no cashflow and do, run out of
• Suppliers are often asked to perform cash.
Here is a list of the bad business practices beyond their original remit. Brian Hayden,
that cause many needless business failures. It is reasonable to negotiate additional Hayden
payments in these circumstances. Associates
• Taking on financial commitments before
the business can afford to pay for them. 4.5 If you need to improve your cashflow
• Doing large amounts of speculative work temporarily, adjust your sales and
in the hope that a customer might then marketing plans to suit.
purchase what you have produced.
• Overvaluing stock, work-in-progress and • Bring forward sales by offering customers
fixed assets such as machinery. incentives to purchase quickly.
• Making no provision for major expenses • Bring forward payments by offering early-
which you know are likely to happen. payment incentives (eg discounts).
• Failing to do any cashflow forecasting, • Focus your marketing on short-term
particularly if your business is struggling lead generation, rather than longer term
to grow. objectives like brand recognition.
• Failing to agree the details of an order
with the customer, or the payment 4.6 If you pay sales commission, link it to
terms, which leads to a dispute. receipt of payment rather than receipt of
• Failing to implement an effective credit order.
control system, starting with credit There is a double cashflow benefit:
checking prospective customers.
• You delay payment of the commission.
Directors’ Briefing 4

• Your sales people will persuade your 6.3 If you hold stock, good stock control can Expert
customers to pay promptly. release substantial sums of money. contributors

• Aim to hold just enough stock to service Thanks to Martin


5 Credit control your customers on an on-going basis. Dunne (Sayers
Identify seasonal peaks and troughs. Butterworth LLP, 020
An efficient credit control system speeds up • Set a target stock-turn (eg six times a year), 7935 8504); Brian
your cash collection and reduces bad debt. It then monitor your performance. Hayden (Hayden
also saves time and demonstrates you run your • The faster your suppliers can deliver to you, Associates, 07785
business professionally. the less stock you need hold. 532266).
• Consider selling off any old or obsolete
5.1 Control how much credit you provide and stock to raise extra cash.
to which customers. Consider using credit
scoring systems and setting appropriate
credit limits for all customers. 7 New funding

• Avoid giving any customer more credit than You need a solid financial base to underpin the
you could afford to lose if the sale turned cashflow of your business. Take full advantage
into a bad debt. of the different types of finance available.

5.2 Send out invoices immediately after you 7.1 Overdraft and loan finance may be limited
have supplied the goods or service. by the security you can give the bank.

• If appropriate, make a follow-up call. 7.2 Factoring allows you to raise finance
Confirm that all the invoice details were based on the value of outstanding invoices.
correct and that there will be no problem
paying it by the due date. • Growing businesses in particular often find
that factoring provides a more substantial
5.3 Monitor late payments and chase them and flexible source of working capital than
up methodically, largest debtors first. overdrafts or loans.

• All businesses — and the public sector 7.3 Consider using asset finance to purchase
— have a legal right to charge interest on computers, vehicles, plant and machinery.
late payments.
• Using a debt collection agency, or a • For example, both hire purchase and
specialist solicitor, can be an effective leasing allow you to spread the cost of the
method of dealing with non-payers. acquisition, with the asset itself providing
the main security.

6 Controlling expenditure 7.4 A strong financial base of equity finance


(and directors’ loans) is vital when a
6.1 Shop around, so you know the prices and business starts up. Subsequent injections
service which you should insist on from of equity finance can help you achieve step
your suppliers. changes in the growth of the business.

• Consider whether you could make savings • For example, if you need extra finance to
by purchasing some types of capital buy another firm or open a new factory.
equipment secondhand.
Consider generating cash by selling off © BHP Information
6.2 Implement simple cost control systems underutilised assets and leasing them back. Solutions Ltd 2009.
across your whole business, to identify Before doing so check whether it will result in ISSN 1469-0470. All
rights reserved. No
scope for cost savings. For a start, four a profit or loss, otherwise you risk generating part of this publication
types of easy savings can usually be found: cashflow to the detriment of your profit and loss may be reproduced or
account. transmitted without the
written permission of the
• Overcharging by your suppliers, such as publisher. This publication
double billing or missing discounts. is for general guidance
• Unnecessary costs, such as heating your only. The publisher, expert
contributors and distributor
premises at night. disclaim all liability for
• Excessive costs, such as high priced any errors or omissions.
services that can be sourced more cheaply. Consult your local business
support organisation or your
• Inefficiency, such as laborious paper-based professional adviser for help
systems which could be computerised. and advice.

Published by BHP Information Solutions Ltd, Althorp House, 4-6 Althorp Road, London SW17 7ED
Tel: 020 8672 6844, www.bhpinfosolutions.co.uk

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