There is a fundamental difference between cash flow and net
profit. Net profit is the bottom line of the profit and
loss account measuring the net growth in financial value.
Cash is the business liquidity and closely related to the
changes in the value of the current business assets in the
balance sheet representing the amount of money the business
has at its disposal to generate further business.
Stock control management
The objective is to reduce the level of stock which uses
working capital within the business.
Stock control is a major potential area where every
business can become more efficient in its cash
requirements. Stock comprises of four main elements, raw
materials, work in progress, finished goods and consumable
stores.. Each area can be managed to reduce the working
capital requirement with an appropriate stock management
system being adopted.
Raw material stocks can be reduced by setting a just in
time stock control policy, negotiating better delivery
schedules and reviewing order quantities with a view to
reducing the value of stock held before it is required for
production or sales.
Work in Progress is mainly a manufacturing area and
governed by the manufacturing process however a review of
the policies can produce efficiencies if excess products
are left lying around waiting to be finished or excess
materials are on the shop floor waiting to be used.
Standard levels of finished stock should be set to satisfy
the requirement to supply all customers on time but avoid
excess stock. Delivery schedules might be reviewed to
ensure delivery times can be shortened to reduce the
requirement for higher stock levels. Ideally the stock
should come in one door and be invoiced out the other door
the same day.
In some businesses consumable stores may be significant and
where any significant working capital investment is
required the policy should be reviewed to save cash by
introducing stock control measures.
Profit margin management
The objective is to sell more cash flow friendly products.
Given a range of products within a business the gross
profit and stock requirements and funding requirements may
be variable. During a credit crunch the products offering
the highest gross profit, fastest turn round and most
economic use of working capital would offer the best
options to reduce the credit crunch effect.
A sound management policy would be to review all products
in terms of the working capital requirements and levels of
gross profit margins with a view to concentrating sales
growth in these product areas.
Financial investment management
The objective is to reduce the draining effect of capital
investment in the business to protect the working capital
requirements.
There are many cash flow issues in this area but
consideration may be given to how fixed asset purchases are
financed. In days of the credit crunch it may be safer to
lease or buy major items on hire purchase than to buy
outright. Different and alternate methods of financing
investments can broaden the funding options open to a
business and reduce the strain on working capital.
Consideration might be given to delaying the purchase of
non essential renewable assets. For example the business
may have a policy to replace the delivery vehicle or
representatives car every three years. Delaying the
replacement by six months saves valuable cash resources and
protects the cash flow.
Consideration in larger companies with numerous investment
projects may be to prioritise the fastest cash generating
projects. Capital investment often requires high initial
investment which is repaid slowly over a period of years
and a reduction in approval rates for such projects can
have significant impact on liquidity.
During the early days of a credit crunch and potential
recession consideration should be given to reviewing all
non or low performing areas of the business with a view to
selling these business areas or assets ensuring they do not
become a drain on the cash resources but instead produce a
positive cash flow the remaining parts of the business can
use to generate higher profits.
Funding management
The objective is to achieve at lowest interest rates
possible adequate funding for all the business cash flow,
working capital and investment requirements.
Planning is essential to make sufficient arrangements well
before the cash is required t6o enable a satisfactory level
of funding at an acceptable rate. Negotiating when a
business runs out of cash is the very worst time to
negotiate funding as it will cost more and may not be
obtained at all.
There are benefits to reviewing the number of sources of
finance and funding available to the business and the
interest being charged. Relying upon one funding source may
be putting all the eggs in one basket. With a range of
potential funding sources smaller amounts can be raised
with each the sum often being higher than might be
available from a single source.
Alternate sources may include leasing and financing
companies, banks and specialist lenders such as stock
finance businesses and factoring companies. One disastrous
source a small business should avoid at all costs would be
to finance the working capital through credit cards where
the interest rate could be so high it could cripple the
business.
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Terry Cartwright designs UK Accounting Software at
http://www.diyaccounting.co.uk/ on excel spreadsheets
providing complete Bookkeeping solutions
http://www.diyaccounting.co.uk/bookkeeping.htm for small to
medium sized businesses
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