Cash is King – Treat it Royally!

Blogger: Colin Spencer, Associate Director

Cash is the lifeblood of any organisation but many businesses forget this. You can be profitable but still go bust if you don’t manage your cash flow properly.

There are many simple processes that can be put into operation to make sure that your cash resources are maximised.

1. How to get your customers paying on time:

• Ensure that your customer is aware of your terms of trade e.g. 30 days payment, and acknowledges that they agree to them.
• Set up an effective sales order/invoicing system.
• Invoice on a timely basis – immediately on despatch of your product or delivery of your service if possible.
• If your customer always issues purchase orders, then make sure that you get one before an order is processed and make sure that you quote the P.O. number on your sales invoice. Otherwise it can give a customer yet another excuse to delay payment!
• Get to know your customers’ payment processes. If they are a large company they may well want all sales invoices sent to their accounts department, accompanied by their purchase orders.  Follow the process.
• If you are buying products or services on behalf of your customers and a supplier wants immediate payment, then speak to your customer and get them to pay you upfront. Always aim to get money into your bank account before you have to pay it out!
• Make sure that somebody in your organisation is responsible for credit control. This person can oversee the collection process by:
  • Regularly updating the accounts so that accurate monthly statements can be sent out to customers; this prompts them to pay sooner.
  • Build up a rapport with the person who is responsible for raising payments at your customer. A friendly call prior payment becoming due can be invaluable – it can ensure that there are no problems with your invoice and therefore no excuses.
  • Chase monies outstanding on a firm but friendly basis.
  • If debts become overdue they should be flagged up with a senior manager who can speak to his or her customer contact to exert more pressure.
  • If debts become seriously overdue then this person can initiate stronger action such as putting accounts on stop, legal letters and ultimately recovery of debt.

2. Suppliers – Moving onto suppliers, you need to have a system in place that enables you to know your future commitments, i.e. all the liabilities for purchases made. Once again there are good procedures you can set up that will help you:

• Agree terms of trade with your suppliers up front
• Set up a purchase order system to deal with the buying of goods and services, covering price, delivery etc. For control purposes, purchase orders should be matched against invoices from suppliers.
• Make somebody responsible for allocating and reconciling payments to suppliers on a regular basis. This will ensure that duplicate payments can be avoided.

3. A regular bank reconciliation will be of great value to ensure that payments and receipts are accurately allocated so that information relating to customers and suppliers is correct and up to date.

4. Cash flow forecasting

In the current economic environment, where credit from banks has become very difficult to secure, and customers take longer to pay their bills, businesses must be able to have an accurate picture of their cash flow so that they can be aware at an early stage of any problems.

Assuming that you have set up effective procedures to optimise your cash flow, you will need to have systems in place that enable you to accurately record financial performance and set up budgets, which can then be updated on a regular basis by forecasting sales, cost of sales and overheads in the forthcoming months. Payment patterns can be ascertained from customers to plot cash coming into the business.

For outgoings regular payments such as purchases, salaries, rent, rates and other overheads as well PAYE, VAT can be calculated from the forecasts. It is also important to make allowance for any corporation tax liability which is due nine months after the end of the financial year. All this information can also be used to produce a weekly or monthly cash flow forecast.

Presenting reliable profit and loss and cash flow projections to your bank will give it comfort that you are in control of your financial affairs and they are more likely to be helpful. It also gives you an accurate picture of where you are financially.

5. Managing costs

In protecting your bottom line, you not only need to focus on increasing your sales, you also need to reduce your expenses. The key to achieving a positive cash flow is to understand your costs and review these carefully on a monthly basis.

Blogger: Colin Spencer, Associate Director

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