Cash Management
We have both, in various guises, been self employed for most of our working lives. Survival has therefore always been about having sufficient cash available to run the business. This is not just about the bank balance but knowing your immediate, short and longer term funding requirements.
Control, discipline and planning are needed to answer these two questions:
· who needs to be paid and when?
· where will the cash come from?
In achieving these objectives the following information should be known:
Expenditure – who are the key suppliers, what are their lead times, credit and payment terms. Credit terms, particularly for large companies, are set by reference to the strength of the published accounts and more importantly current management information. In some instances suppliers e.g. utilities may also demand a cash deposit to be held against future supplies.
Ideally credit limits should be sufficiently high to meet the requirements of the business for two months, but this may not be possible for smaller entities. To hit the credit limit on a regular basis is not good for the reputation of the business. It will impact on trading and disrupt cash management. Having two/ three suppliers with lower credit limits may therefore make cash management easier.
The days in the month on which payments fall –suppliers, direct debits, payroll, tax etc needs to be known.
Income streams – this is usually provided from sales revenue. If primarily generated by cash and credit card sales it makes credit control very easy. If sales are made on credit terms then effective cash collection is dependent on ensuring that the credit terms are defined in writing, invoices reflect the agreed prices and pod’s can be provided if requested. If a quality issue arises it needs to be promptly resolved. Regular contact with customers will determine whether an invoice has been approved and when payment can be anticipated.
Factoring & invoice discounting – by factoring a debt it is sold to a third party who will be responsible for credit control; since the ledger will be one of a number monitored it is likely to lead to a loss of control and the failure to promptly resolve queries and disputes. This will impact on cash availability. Invoice discounting is a more attractive alternative since the credit control function is retained within the business.
Cash management
By charting weekly payments and receipts together with the overdraft and / or factoring and invoice discounting facilities it will be possible to generate a rolling weekly cash flow forecast which will highlight the ability of the business to work within its cash resources. This will provide both an immediate and early warning of a potential cash shortfall.