Sales turnover and net profits may follow a rollercoaster
pattern familiar to most business but when the cash flow
dries up the game is over. Cash flow management is critical
not just to business performance but to business survival
in the days and months of a credit crunch. Accounting
software can offer many solutions but there is no
substitute for astute management to boost cash flow and
reduce liquidity risks.
Most businesses will experience periods of lower sales and
times when losses may be incurred as expenses exceed sales
income. With a sound business the position is recoverable
by gaining extra sales growth or reducing expenditure. A
business that runs out of cash resources is dead in the
water.
Debtors and sales income management
The objective is to obtain payment from customers as fast
as possible improving cash flow and minimising the risk of
bad debts and not being paid at all.
Payment terms offered to customers should be clearly stated
and fixed as standard accounting figures according to the
amount of funding the business is prepared to offer its
clients. Because that is exactly what credit terms to
customers is, free cash funding in exchange for eventual
sales income.
Consideration should be given to using a cash discount
system to encourage sales invoices to be paid faster. In
some businesses it would be appropriate to obtain up front
deposits and scheduled payments. Review this practise to
obtain a greater proportion of payments faster to improve
liquidity.
New customers should be subjected to a strict credit check.
All new customers where credit check details are not
available should be invoiced by the accounting function on
a pro forma basis. Any businesses who fail to meet the
highest credit score required should remain on a pro forma
invoice basis.
Each business should determine a set of credit control
procedures including issuing sales invoices, producing
customer statements of outstanding balances and a standard
set of credit control letters that actually get the cash
in. An essential process in the credit control procedure
would be to ensure the accountant or bookkeeper always
issues sales invoices and customer statements promptly.
Incorporate into the terms of trade a set of rules to
invoke interest payments for late payment and late payment
debt recovery costs. In the UK the Late Payment of
Commercial Debts (Interest) Act 1998 sets out the statutory
rights of business to claim interest and costs.
Consider the possibility of factoring sales invoices due
from debtors either by selling the sales invoices to a
third party or raising cash on the value of those invoices
pending payment. Factoring has the disadvantage of often
not being cheap but does have the advantage of generating a
regular stream of cash.
Bad debts have a double impact on any business and all
possible steps should be taken to reduce the risk. A bad
debt not only uses valuable resources in chasing the debt
with the negative impact on cash flow and liquidity but
also is a straight loss to the net profit and a strong
indicator that the accounting function is failing the
business.
Creditors and expenditure management
The objective is to extend the time allowed for payment of
expenses the business incurs.
Consider the frequency of all payments made to suppliers.
Small business often has alternative payment terms
available for the payment of taxes. In the UK value added
tax can be paid quarterly or monthly, vat cash accounting
can ease the tax liability due in critical periods and paye
payments can be paid quarterly rather than monthly for
smaller businesses.
Consider the frequency which wages and salaries are paid. A
sensitive area since it involves the most important people
to the business success but adopting a payment period to
coincide with the receipt of cash from customers may in
some circumstances balance liquidity.
General creditors are a major area to be addressed in terms
of both the amount of credit received from suppliers and
the time required to pay those creditor accounts. Larger
orders on extended payments terms creates a risk area
should the goods not be used but can greatly assist cash
flow as the business is effectively borrowing free cash
from its suppliers.
Stock levels are crucial to financial management of the
creditor total. High stock levels use valuable working
capital which is offset in part by the level of creditors.
Higher levels of stock financed by free credit from
creditors lowers the cash flow requirements on the other
parts of 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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