Tips for improving Cashflow

As businesses start to recover after Covid-19, cashflow management is more important than ever.

There are a few fairly straightforward things you can do to maximise your cash and help fund your recovery:

  1. Keep your cash forecasts up to date
  2. Be persistent with your credit control
  3. Make sure you are maximising the payment terms with your suppliers
  4. Look to make cost efficiencies where you can
  5. Manage your stocks by buying efficiently and selling off old inventory. 

This very helpful article from Development Bank of Wales offers 11 tips to maximise cash. 

This is a link to an earlier article I wrote on turning working capital into cash.

If you need any help to maximise cash from your current processes then please do get in touch!

Finance Director: 5 Tips to manage your SME out of lockdown

Finance Director

Covid-19 has fundamentally reshaped the UK’s economic landscape and there have been many casualties along the way. But now that the initial reaction phase is over, getting back to some sort of ‘business as usual’ offers a new set of challenges.

How can the Finance Director support the SME to get back on its feet?

  1. Flexibility planning

The budget is out of the window, now is the time to focus on scenarios, what happens if sales half…or double? Understanding your new market place, competitors and consumers is key to the actions that follow on. Then depending on the outcome, look at restructure, operational efficiencies and overhead reductions accordingly. An article I wrote on forecasting could help:

  1. Improve liquidity

Based on the scenarios look at cashflow requirements. Ensure credit control is functioning effectively, purchase efficiently and work with suppliers to agree terms. The Government is offering a variety of loans, grants and benefits and reliefs, can these be utilised? Revisit financing arrangements, can further cash be drawn down? Or a low interest loan be utilised? I refer to an article I wrote on improving working capital here:

  1. Managing the Team

With children at home for the next few months, there is likely to be a period of hybrid working with some in the office and some working from home. Ensuring that the teams are working effectively and productively in the period is paramount. Keeping on top of the reporting requirements is essential as is ensuring the health and wellbeing of the team. I wrote an article on ways to avoid zoom fatigue that may help:

  1. Stakeholder Communication

Ensuring that the wider business has the right information at the right time to make decisions. Ensuring that investors and lenders are kept in the loop about the business as they may be able to help. Ensure that employees are kept informed to ensure they still feel part of the team even when working remotely. Keep the lines of communication open with the supply chain to anticipate problems in supply, price changes or when customers change their orders.

  1. Manage risk and build resilience

Revisit your risk model and update with new knowledge as it arises. Your competitors may have adjusted to Covid-19 well and what can you learn from how they have adapted? Look to build resilience into the business, alternative suppliers, new sales channels such as E-Commerce and building an agile workforce. Many businesses have shown great innovation over this period, especially with their use of IT, and this could be the source of differentiation going forward.

Putting these steps in place will not only help you recover and survive from lockdown, but to potentially thrive. As Benjamin Franklin said “Out of adversity comes opportunity.”


5 Steps to Cash Forecast Heaven!

A recent report by Menzies the Accountants suggested that a third of SME’s are concerned about future cash forecasting, especially with economic and Brexit uncertainties. As running out of cash is one of the main reasons for business failure, now is a good time to ask, “is my cash forecasting as good as it could be?”

Producing an accurate cash forecast is challenging, but it is vital to ensure you have enough cash to conduct business and predict when additional funds are required. It can also indicate the type of financing required whether this be for the short or long term.

This is my guide for pulling together a month by month cashflow forecast:

Inflow profile
The starting point is to estimate when sales will be made and apply the payment terms to establish when the cash inflow will be received. Remember to include VAT as appropriate and factor in any predicted price changes or contract wins. Plan in the timing of any irregular income such as grants, R&D tax credits, rent received, VAT refunds etc

Outflow profile
Based on the demand for sales, estimate when products and staff will be required and cost appropriately including VAT if applicable. Use the profit and loss as a guide to forecast associated costs and apply the payment terms to deduce when the outflows will be incurred. The timing of irregular payments such as rent, rates, tax, capex and dividends need to be given special attention and ignore any non-cash costs such as depreciation or goodwill write-offs.

Integrated model
For the most reliable results combine these elements into an integrated model with a profit and loss and balance sheet. Excel is perfect for this task and will ensure that the cash forecast is aligned with the financial statements and all checks and balances are in place. This will also give credibility to the figures and comfort to lenders that all three statements are accurate.

Prepare alternative scenarios
It is notoriously difficult to produce an accurate cash forecast due not only to the difficulty in predicting the timing of future cash flows, but the inherent uncertainty of predicting the future! A possible way around this latter problem is to build different models for different outcomes eg one model assuming a contract is won and another assuming it isn’t! Excel can really help simplify this process as it can help crunch the numbers.

Monitor and update
A cash forecast is a dynamic document and regular updates will ensure it gives the most up-to-date position. Gradually you will gain an ability to predict future requirements with increasing accuracy and thus give the business the best opportunity to weather uncertainties and support growth.




6 Ways to turn working capital into cash

A key responsibility of the finance function is to manage working capital and increase the speed at which it is converted into cash. This article offers suggestions as to how this can be achieved.

What is working capital?
Working capital is defined as current assets minus current liabilities. Current in this context means assets that can be turned into cash, or liabilities that are due, within 12 months. Current assets are things like sales ledger receivables, stock on hand or cash, current liabilities are things like purchase ledger payables, accruals, tax liabilities or a bank overdraft.

Why is working capital management so important?
Working capital is a short-term investment and therefore must be funded, so carrying too much stock for instance could be expensive.
The opposite is also true, having insufficient stock or cash could mean lost sales. Therefore, keeping the right balance of working capital is a vital part of any finance function.

Inter-relationship between cash and working capital
Although a current asset, cash stands alone within working capital, because when we are normally trying to reduce current assets (e.g. receivables or stock) we are looking to increase our cash balance!

Working capital management is therefore about increasing the speed with which it is converted into cash, whilst maintaining enough (but not too much!) to conduct business.

Here are the 6 ways to turn working capital into cash with examples from our experience:

1. Increase payables

Ensure that suppliers (or other payables) are not paid before they fall due. Systematically go through your supplier list to negotiate longer payment terms to ensure they are longer than your receivables terms. Carry out this task after the filing of the annual accounts as improved financials often result in improved terms.

2. Decrease stocks

Aim to order the right stock in the right quantities at the right time! Not easy but systems and processes can help. Ensure that product issues are resolved quickly and effectively. Try to shorten the manufacturing process and reduce the time between purchase and sale. Going forward negotiate good prices and make your proposition something the supplier cannot refuse!

3. Decrease receivables
Credit control is a vital element of a finance function and chasing customers to pay on time is very important. Ensure invoices are generated quickly and trigger your debt collection procedure on overdues as early as possible.
Retail businesses are fortunate to sell very little on credit terms, their cash comes in quickly either by cash or credit card. Perhaps your businesses can take a leaf out of their book by selling more via credit card, thus getting the cash quicker and with less risk. Consider invoice discounting as a way to get paid quicker.

4. Improve profit
Ensure that profitability is considered in everything that you do. Whether this be by “right first time” or in buying stationery, profit should always be considered. So often have we seen the benefit of hard negotiated cost reductions drained away by inefficiencies in a business.
Ensure that you have good management information and make strategic decisions based on the findings. Use budgets and variance analysis to focus managers on cost control.

5. Long term debt or equity investment (cash injection)

Either will improve current assets more than the current liabilities (debt due within a year) and hence increase working capital and cash. But would they be right for your business?

6. Match asset term with debt term

It is not a good idea to buy long term assets (e.g. vehicles and equipment) with short term working capital. Match the term of the debt with the expected life of the asset. e.g. if a fork lift will last 5 years, lease it over 5 years rather than buying outright with cash.