The subject is all about timing. In the long run, a rewarding business will generate cash. In the short term, it is trading over the previous few weeks and months that determine income in the next few weeks. The task is to accelerate receipts and delay payments whenever possible. However , you are constrained by law, contractual relationships, good commercial practice and the pressure that your business partners are prepared to apply.
Make the bank manager your own friend
Most companies depend on loan or even overdraft finance, so the bank supervisor is a key person with whom you must develop a strong relationship. She or he wants to receive regular management info, together with early warnings of issues, so make sure you provide that, plus check regularly that he or she is happy with what’s being sent.
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You need to understand the lender manager’s limits, in two feelings:
What are the formal bank limits to his or her decision making authority.
How far are you able to push him or her beyond the nominal borrowing limits that you have been set.
You may have a very strong relationship with your manager, but if he or she is unable to raise your limit without referring to higher expert, you relationship may be of restricted value to you.
You should also explore along with your manager any possibilities for re-financing that might reduce your borrowing costs and/or give you greater borrowing capacity. Leasing or asset financing may give a person more flexibility than you have presently.
Elements of cash flow
Different elements of your money flow require different management approaches.
You have very little scope for manoeuvre here. If a business isn’t going to pay its staff on time, the credibility is compromised, possibly fatally. You may be able to get staff in order to agree to a delay in transaction, possibly from mid-month to end-month, if they know the company’s finances are usually stretched. But you can only do this as soon as.
It goes without saying that getting your clients to pay on time is key to strong cash flow. The separate article with this subject goes into more detail, but you need a rigorous and structured method of this area, combined with strong romantic relationships with your key customers.
We couldn’t recommend a deliberate plan of paying suppliers late. But you need to ensure that your payment process takes the maximum amount of credit & runs with the minimum of inefficiency and frenzymadness, desperation, hysteria, mania, insanity, delirium, derangement. Again, there is a separate article which tackles this topic in more level.
Depending on the jurisdiction in which you might be operating, you may be able to extend the credit period for payroll fees, sales taxes/VAT or tax on profits. You need to talk to other financing people in your country to discover what is possible.
One thing you should never do is merely not pay without asking for action. Without exception, tax authorities have a very dim view of that and are also likely to bring all sorts of unpleasant effects down upon you.
When interest or loan repayments are due to your bank, they have the distinct advantage that they can dip into your bank account and help themselves. Using your strong relationship with your financial institution manager, you may be able to get some assistance here.
You can’t do that on your own. You need to involve your some other directors and managers in the job. Make them aware of the vital significance of cash flow and enlist their help. In every negotiation with customers, they must be looking to reduce payment terms; and with suppliers to increase payment terms. It is surprising how rarely payment conditions feature in commercial negotiations, however, you need to make sure that your company is an exception to this rule.
If you want to give your own Directors some further incentive to operate on cash flow, look up the rules on wrongful trading or trading while insolvent. In most jurisdictions, there are scary penalties that can apply to Directors during these situations.
Watch for fraud
Any company can be at risk of fraud. You need to ensure that opportunities are kept to a minimum by making sure there is a double check on payrolls, new vendors, supplier payments plus banking. It’s particularly difficult in small businesses where one person does every thing, but only vigilance of this type can protect the company.
Ensure that somebody regularly audits aspects of the construction function, in a visible way, to ensure that staff know they are being checked up on.
Forecast and monitor
The weekly or even daily forecast is definitely an essential tool to keep on top of your cash flow. It’s simple to build on Excel. The trick is to check your forecasts against actuals and ensure you learn from where your forecast is inaccurate. You will rapidly come to understand the main patterns of payment and be able to use them to your advantage. For example , you may find that a major customer often pays you on the Tuesday after your invoices are due. By pointing out that this is late, you may be able to get them to switch to the particular Tuesday before due.
Maintaining cash flowing is an essential job for any finance team. Using the concepts in this article, you can get the timing correct and keep your business afloat.