Managing cashflow

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.

In the past, most businesses have relied on bank overdraft finance and have reached their borrowing limits quickly. Alternative methods of funding allow you to raise more finance (see 7).

Salaries (including National Insurance contributions) are often the largest and most inflexible cost.

Other major costs might include stock, raw materials and any capital expenditure.

Many businesses have to fund large amounts of work-in-progress.

For example, a design agency might spend six months on a project before the client is prepared to be invoiced. In the meantime, the agency has to foot the bill for all the materials and labour that go into the job.

Buying significant items just before a VAT period ends, rather than at the start of the next one, can help your cashflow.

You must pay interest - and repay capital - to lenders such as the bank.

If there is spare cash, you - and other shareholders - may want to draw back any personal loans made to the business.

You can quickly update your projections and make 'what if' calculations. For example, what if sales are 20 per cent below forecast for six months in a row?

For maximum flexibility and ease of use, you can use special forecasting software, such as Winforecast.

You could use graphics to make it easy to detect patterns and step changes.

Estimate the sales and margins, based on past experience. Overheads such as rent can be accurately predicted.

Identify the major outgoings, especially those on fixed dates, such as the monthly payroll.

Make sure you will have sufficient cash on the day, to cover each payment.

The key is to be realistic. For your regular sales, use the established figures for sales volumes, debtor periods and bad debts.

For any new products or customers, be pessimistic - expect problems and delays and do not book a sale until the customer has paid the invoice.

Be aware that monthly forecasts do not take into account weekly fluctuations.

For example, the volume and status of sales leads and the volume of orders.

A bank which trusts your forecasts will be more prepared to extend your borrowing facility when you need extra finance. (See Managing your creditors)

For example, if you know you will be short of cash in three months' time, you might reduce stocks, slow down sales growth, or agree extended credit from a major supplier for that period.

The only way to generate cash over the long term is through retained profits.

By comparing your performance with the budget, you can quickly judge whether sales and profits are going to plan.

Create a useful yardstick by working out how much extra working capital is required to fund each 10 per cent increase in monthly sales.

Restrict the growth of your business to whatever you can comfortably afford to finance. Always keep a financial reserve available for contingencies.

Your sales manager must let you know as early as possible if leads, orders, or sales, fall below a certain threshold, or if planned sales will be later than forecast. Or if a substantial customer stops buying from you.

Your financial controller should warn you if key indicators such as profit margins, liquidity ratios and stock ratios deteriorate beyond an agreed limit.

You also need to know about any substantial invoices which are in dispute, particularly late debts and customers exceeding their credit limits.

Increasing prices may reduce sales (and therefore cashflow) in the short term.

But this is often outweighed by its major positive impact on profitability and cash generation over the longer term.

To avoid this risk, you may need to delay some orders and decline others. (See 3.2)

You may be suprised at how easy it is to obtain deposits. For example, to pay for any materials which you need to buy in.

Negotiate stage payments for contracts which will take time to complete.

Include a timetable for the customer to pay invoices as part of this agreement.

Agree a clear specification for the work to be completed, to minimise the chance of the customer disputing any invoices.

Suppliers are often asked to perform beyond their original remit.

It is reasonable to negotiate additional payments in these circumstances.

Bring forward sales by offering customers incentives to purchase quickly.

Bring forward payments by offering customers incentives (eg discounts).

Focus your marketing on short-term lead generation, rather than longer term objectives like brand recognition.

You delay payment of the commission.

Your sales people will persuade your customers to pay promptly.

Avoid giving any customer more credit than you could afford to lose if the sale turned into a bad debt.

If appropriate, make a follow-up call. Confirm that all the invoice details were correct and that there will be no problem paying it by the due date.

All businesses - and the public sector - have a legal right to charge late-paying customers interest on contracts. See Interest on late payments for further information.

Using a debt collection agency, or a specialist solicitor, can be an effective method of dealing with non-payers.

Consider whether you could make savings by purchasing some types of capital equipment secondhand.

Overcharging by your suppliers, such as double billing or missing discounts.

Unnecessary costs, such as heating your premises at night.

Excessive costs, such as high priced suppliers providing a product or service that a low price supplier could provide.

Inefficiency, such as laborious paper-based systems which could be computerised (to reduce costs in the long term).

Aim to maintain just enough of each type of stock to service your customers on an on-going basis. Identify seasonal peaks and troughs.

Set a target stock-turn (eg six times a year) for each category of stock, then monitor your performance.

The faster your suppliers can deliver to you, the less stock you need hold.

Consider selling off any old or obsolete stock to raise extra cash.

Growing businesses in particular often find that factoring provides a more substantial and flexible source of working capital than overdrafts or loans.

For example, both hire purchase and leasing allow you to spread the cost of the acquisition, with the asset itself providing the main security.

For example, if you need extra finance to buy another firm or open a new factory.