Cash Management for Business

The topic is all about timing. In the long run, a lucrative business will generate cash. For the short term, it is trading over the previous few several weeks and months that determine cash flow in the next few weeks. The task is to speed up receipts and delay payments as much as possible. However , you are constrained by law, contractual relationships, good commercial practice as well as the pressure that your business partners are prepared to apply.

Make the bank manager your own friend

Most companies depend on loan or even overdraft finance, so the bank manager is a key person with whom you must develop a strong relationship. She or he wants to receive regular management information, together with early warnings of problems, so make sure you provide that, and check regularly that he or she is happy with what’s being sent.

You need to understand the bank manager’s limits, in two detects:

What are the formal bank limits to his or her decision making authority.
How far are you able to push him or her beyond the minimal borrowing limits that you have been fixed.
You may have a very strong relationship along with your manager, but if he or she is unable to improve your limit without referring to higher authority, you relationship may be of limited value to you.

You should also explore together with your manager any possibilities for re-financing that might reduce your borrowing costs and/or give you greater borrowing capacity. Renting or asset financing may give a person more flexibility than you have presently.

Elements of cash flow

Different elements of your cash flow require different management methods.

Payroll

You have very little scope to get manoeuvre here. If a business doesn’t pay its staff on time, the credibility is compromised, possibly fatally.
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You may be able to get staff to agree to a delay in transaction, possibly from mid-month to end-month, if they know the company’s finances are usually stretched. But you can only do this as soon as.

Customers

It goes without saying that getting your clients to pay on time is key to strong cash flow. The separate article on this subject goes into more detail, however, you need a rigorous and structured approach to this area, combined with strong associations with your key customers.

Suppliers

All of us couldn’t recommend a deliberate plan of paying suppliers late. But you need to ensure that your payment process takes the maximum amount of credit & operates with the minimum of inefficiency and muddiness. Again, there is a separate article which tackles this topic in more level.

Tax

Depending on the jurisdiction in which you are operating, you may be able to extend the credit period for payroll fees, sales taxes/VAT or tax on profits. You need to talk to other financing people in your country to discover what is possible.

One thing you should never do is just not pay without asking for an extension. Without exception, tax authorities have a very dim view of that and therefore are likely to bring all sorts of unpleasant consequences down upon you.

Financing expenses

When interest or loan repayments are due to your bank, they have the distinct advantage that they can dip into your bank account and help them selves. Using your strong relationship with your financial institution manager, you may be able to get some support here.

Involve others

You can’t do this on your own. You need to involve your various other directors and managers in the task. Make them aware of the vital importance of cash flow and enlist their assist. In every negotiation with customers, they should be looking to reduce payment terms; along with suppliers to increase payment terms. It is surprising how rarely payment terms feature in commercial negotiations, however, you need to make sure that your company is an exclusion to this rule.

If you want to give your Directors some further incentive to operate on cash flow, look up the rules upon wrongful trading or trading while insolvent. In most jurisdictions, there are terrifying penalties that can apply to Directors in these situations.

Watch for fraud

Any company can be at risk of fraud. You need to ensure that possibilities are kept to a minimum by causing sure there is a double check on payrolls, new vendors, supplier payments and banking. It’s particularly difficult in small businesses where one person does almost everything, but only vigilance of this type can protect the company.

Ensure that somebody regularly audits aspects of the data processing function, in a visible way, to ensure that staff know they are being examined up on.

Forecast and monitor

A weekly or even daily forecast is an essential tool to keep on top of your income. It’s simple to build on Excel. The key is to check your forecasts against actuals and ensure you learn from where your forecast is inaccurate. You will quickly come to understand the main patterns of payment and be able to use them to your advantage. For instance , you may find that a major customer often pays you on the Tuesday after your invoices are due. By pointing out that this is late, you may be able to get them to switch to the Tuesday before due.

Conclusion

Maintaining cash flowing is an essential task for any finance team. Using the ideas in this article, you can get the timing right and keep your business afloat.