Cash Flow Projections
An essential element of cash flow management is a cash flow projection. Cash flow projections help businesses to prepare for potential cash shortages by:
Maintaining adequate cash reserves to pay bills, expand the business and make capital improvements
Reduce interests costs through managing borrowing
Increase interest income by shifting funds into higher-interest accounts
Receive discounts through bulk purchasing
Improve relations with the bank
By preparing a cash flow projection for you, you can also gain better knowledge of your businesses system, for example you may learn a way to time payments to suppliers more beneficially.
To start up your own cash flow projection, a simple system can be set up by creating a spreadsheet to track cash flowing in and out. A more sophisticated analysis might include monthly cash projections for the next 12 to 18 months.
First, forecast your operations on a monthly basis for the period involved. You can project the cash coming in based on sales and the collection process. Material purchases are based on the amount needed for sales, adjusted according to variations in your stock levels as a result of turnover. Finally, payments to suppliers and expenses need to be taken into account, based on the payment due dates.
Once you’ve projected your cash flow based on this forecasted data, you can budget for capital expenditures, unusual sources of cash or other things that might affect cash flow.
Avoiding Bad Debts
Having bad debtors is damaging to cash flow and can be extremely dangerous for any business. Techniques to avoid bad debtors include:
Obtaining a credit reference on the organisation that you intend to trade with
Avoid doing business with companies whose credit rating is poor
Ensuring that the other company knows your payment terms at the outset
Invoicing at the earliest opportunity
Stating the payment terms clearly on your invoice
Sending a reminder as soon as possible, if payment is not received by the due date and having a policy to chase the debt after a fixed number of days following the due date
Chasing up the debt by telephone if there is still no response. This will enable you to determine whether there are any queries on the invoice and, if not, to discuss a date for the settlement
Writing to confirm the agreed settlement date and send by fax or post
Stating clearly that the matter will be referred (after the agreed extended period) to either a debt collection agency, a firm of solicitors, or the county court small claims department
Better Financial Control
Business people recognise that generating healthy cash flow requires a substantial amount of control of your finances. This is achieved by:
Deciding which areas you need to monitor and how frequently
Generating the numbers quickly and accurately
Sharing the results with everyone who needs to know them
Interpreting the numbers correctly
Taking appropriate and timely action based on your interpretations
The starting point is to set up a system that enables you to generate accurate reports as quickly as possible.
Receivables
An unfortunate fact of any business transactions is that customers will often postpone their sales as long as possible. Cash management, on the other hand, requires the timely collection of every sales dollar. An assertive collection program is therefore essential in managing your business’s cash balance. Assertive collection requires:
An initial screening of customers before they are granted credit
Establishing a firm written credit policy and letting every customer know in advance the company’s credit terms. For example; When will you invoice? How soon is credit due? Will you add a late charge?
Taking immediate action if an account becomes overdue
Depositing customer checks and credit card receipts daily. Some banks allow owners to deposit directly into interest bearing accounts
Payables
The timing of payables is just as crucial to proper cash management as the timing of receivables; however the objective is just the opposite. Business managers should attempt to stretch out payables as long as possible without damaging the company’s credit rating. If the company’s credit rating is damaged suppliers may begin demanding prepayment which will severely damage the company’s cash flow. Companies who are successful in avoiding this whilst stretching out their payables often do things like:
Take advantage of cash discounts vendors offer. A cash discount offers a price reduction if the owner pays an invoice early
Negotiate the best possible credit terms with suppliers. Most vendors offer trade credit
Scheduling controllable cash disbursements so that they do not come due at the same time (for example, paying employees every two weeks rather than every week, reducing administrative costs)
Using business credit cards wisely. Avoid cards that change transaction fees as some change interest from the date of purchase but others only from the invoice date
Inventory Financing
How much are you spending on goods and materials? Do you have too much in stock? Inventory is a significant investment for any small business and can create a severe strain on cash flow. Surplus inventory yields a zero rate of return and unnecessarily ties up the firm’s cash. Businesses can avoid these common problems of inventory managements in a number of ways, including:
Marking down items that don’t sell well. This will keep inventory lean and allow it to turn over frequently. Although volume discounts lower inventory costs, large purchases can tie up the company’s valuable cash.
Avoiding overbuying inventory. It is important to recognise that excess ties up valuable cash unproductively
Scheduling inventory deliveries at the latest possible date. This will prevent premature payment of invoices
Purchasing goods from the fastest supplier in order to keep inventory levels low