Introduction
In the current economic climate, the application of the saying ‘Cash is king’ has never been more appropriate.
It is essential that effective cash management practices are in place in order to manage cashflow more vigilantly than ever before. This consistent management of cashflow is necessary if a business is to continue to meet its financial commitments. The cash that flows in and out is essentially the lifeblood of any business. The reason most businesses fail is due to a lack of cash.
The following are a list of some of the key cash management tips:
1. Prepare a cash management plan
The preparation of a cash management plan is the essential starting place. It is the classic road map analogy – it begins with identifying the place where we are in the current moment and ends with the place we need to get to. The plan gives direction to the business by setting out how the business will get to the required destination.
Once prepared, it will be necessary to review and assess the plan on a regular basis in order to monitor it closely so as to compare the actual cashflow against projections. This will allow informed decisions to be made by the business owner.
2. Address potential cashflow problems
The drafting of an accurate cash flow projection will identify any future period(s) in which a shortage of cash will arise. It is vital that such cashflow problems are foreseen so that the business can be proactive about taking steps to address the situation. Arrangements for credit from banks and suppliers can be prepared well in advance in order to address the temporary shortfall. By identifying the anticipated pressure on the cash flow of the business allows for early intervention.
3. Efficient trading stock management
A strategy for efficient stock management is vital to reduce cash flow hold-ups. Stock can be converted into cash by reducing the level of any excess stock on hand. It is important to identify and maintain the appropriate level of stock in order to meet customer demands. This presents real opportunities for freeing up cash.
Attempts should be made to turn any slow moving stock items into cash by reducing the price and having a certain area to display same. This would be even more important for goods which are coming close to their best before date.
A review of the product mix is also important in the context of any efficient stock management system. Sales reports will identify the popular stock items and the slow moving stock items. This will allow for more efficient purchase ordering and prevent having dead money tied up in stock.
4. Credit Control
The main area of a business in which cash tends to become locked-in is in the area of Debtors, thus credit management is critical. The current climate is not a time to be taking on more debt.
I summarise some of the main points here:
- If the credit sale is to a new customer, make sure the customer completes and signs a credit application form therefore collecting as many details as possible and whereby you can initially stress your credit terms. It is also important to run credit checks.
- It is necessary to have an efficient and effective credit control policy. Ensure your customers are aware of the credit policy specific to them as regards their credit terms and credit limit.
- Invoice early and often – make sure to issue and send all sales invoices on time, every time to your customers. The invoice should clearly state and reinforce the credit terms. It is also advisable to include your bank details on the invoice. Also, all sales invoices issued should contain a Retention of Title clause to the effect that all goods remain your property until paid for in full.
- Follow up on invoices issued by calling to confirm receipt of the invoice and to ensure that there is no issue or dispute with it. This can help prevent delays further down the line.
- Having issued the invoice early and followed up on receipt of same, it is important to maintain communication with debtors at the due date. Remember, the sales process is not complete until you are paid so it is important to collect funds due from customers. You should make the process of receiving monies from your debtors as easy as possible.
- Issue statements and reminders to customers.
- If payment is not received by the due date, follow up immediately by email and or phone. If payment is still not forthcoming, use collection services or legal action when necessary.
- Review the credit policies for your customers. Are they making payments within their credit terms? Have you applied credit limits to their accounts? Are credit stops in place where necessary? It is the business owner/manager’s decision to extend credit. Where a customer has a continuous history of late payment, it may be necessary to change the credit terms of even consider withdrawing credit supplies to that customer. Supply on a cash on delivery basis (c.o.d.) as an alternative.
- Finally, bear in mind that the older the debt becomes, the lesser the chance the business has of receiving it.
5. Surplus Assets
- Does the business have any surplus asset(s) (e.g. truck) which it is not using? It might be possible to dispose of same and realise cash.
6. Consider having an invoice discounting facility
Invoice discounting is where a lender provides cash advances against your outstanding invoices. The lender can provide access to cash of up to 85% of the value of the invoiced debt. The main advantage of having an invoice discounting facility is that it allows sales to be converted into cash quickly thus easing cash flow problems. The main disadvantage is the costs associated with the facility – be aware of what is essentially a high interest charge.
7. Introduce cost improvement programmes
In the current economic climate, it is essential that all costs are kept under control. All costs should be reviewed on a line by line basis with a view to establishing if they can be reduced. It is vital not to lose control of your costs. Don’t be afraid to ask for better terms and get quotes from other suppliers.
8. Tax Liabilities
It is essential to pay all tax liabilities as they fall due to avoid interest and penalties. It is best to be proactive in terms of engaging with Revenue.
In some cases, it is possible to get Revenue agreement to go on an annual scheme for VAT and/or PAYE/PRSI so to spread the tax liabilities over the year.
From a cashflow point of view for VAT, your business might qualify for the “cash receipts” basis. The advantage of accounting for VAT on this basis is that VAT is not payable on sales invoices until such time as you receive payment. VAT is still deductible on purchase invoices in the normal way.
To be eligible for the “cash receipts” basis, your business must either:
- Have an annual turnover of less than €1m
OR
- 90% of its sales is to unregistered customers.
Also, where there are currently tax liabilities outstanding with Revenue, it may be possible to reach agreement with Revenue to pay the liability over a number of years. Revenue have formalised this procedure by requiring the taxpayer to complete a Phased Payment Application form (PPA1). It will be necessary to demonstrate an ability to pay the outstanding tax liabilities and to commit to pay future liabilities as they fall due. The backup documentation required by Revenue depends on the total amount of the outstanding liabilities.
9. Preserve cash by maximising credit terms from your suppliers
Check on the credit terms that your suppliers will extend to you. Most suppliers allow 30 days but it may be possible to extend this to 60 or 90 days preserving cash in your business.
Along with seeking to extend credit terms, inform your suppliers that you are introducing a cost improvement programme and are reassessing your cost base.
In some instances, the business when making a purchase must weigh up more flexible payment terms from one supplier against the cheaper costs of another.
© Tommy Walsh 2012
