February 2010

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February 2010

Effective cashflow management

Effective cashflow management

With lack of liquidity the most common cause of business failure, effective cashflow management should remain a priority for your business regardless of the wider economy. So what’s the key to positive cashflow?

"Effective cashflow management can mean the difference between failure and survival, especially when access to credit is tight," says Chas Roy-Chowdhury, head of taxation at the Association of Chartered Certified Accountants (ACCA), the global body that represents accountants.

"Cash will always be king. Not turnover. Not margin. If you don’t have enough cash to pay your bills your business will fail. Many profitable enterprises have found this out to their cost."

Claire Owen, HSBC Start-Up Stars judge and Leader of Vision and Values at the Stop Gap Group, adds: "Working capital becomes tighter and cash balances leaner in a recession, as debtors take longer to pay. Some larger companies have been pushing payments to 90 days. This can be exacerbated if your business has previously been inadequately capitalised or makes substantial losses."

Preventative measures

Owen underlines the importance of having a good business plan. "Operational and financial management shouldn’t be left to chance. A good business plan enables anticipation of events. Sound forecasts can enable you to foresee potential cashflow crises."

Roy-Chowdhury recommends keeping a close eye on how much you have in the bank, how much you owe and are owed (ie your ‘cash position’). Get the balance wrong and you’re in trouble.

"If you grant credit, making sales can lure you into the false belief you’re doing well. The reality can mean having to wait a long time to get paid – if at all – by bad customers. Always be very careful when granting credit."

Tough times

Owen concurs: "The possibility of bad debts in these times is greatly enhanced and even seemingly stable customers can quickly become insolvent. Remain aware of the economic conditions in your markets and vary your terms of trading and debt collection accordingly.

"The longer a debt remains unpaid, the harder it becomes to recover. There’s always a conflict between chasing debts and ongoing business, but if you’re experiencing serious debt problems with a customer – why would you want to carry on doing business with them?"

Roy-Chowdhury is more concessionary: "If a valued customer is experiencing genuine problems, you may settle for part payment or give more time – but never grant additional credit.

"Make sure customers know your terms and chase outstanding invoices as soon as they become payable. Send out your invoices promptly. Carry out thorough checks before granting new customers credit and if you have any doubts, politely decline."

Cost analysis

Roy-Chowdhury continues: "Naturally, your creditors will expect to be paid on time. This includes tax – something that kills many businesses. The government is keen to help small firms via its Business Payment Support Service. HMRC will even reschedule or defer tax payments to ease the strain on small firms’ cashflow."

Both experts agree – you should try to maintain your sales and margins, while minimising your costs. There should be a sound business reason for every pound you spend. Waste and inefficiency must be eliminated, which frequently involves difficult decisions, such as redundancies, but such decisive action can enable survival.

However, Owen adds, excessive cost cutting or cut-backs in the wrong places can seriously harm a business. She cites marketing as a classic knee-jerk example that hampers sales. Another risk, she says, is being left with insufficient staff to keep the business competitive.

Looking ahead

"Your must remain lean and efficient," Roy-Chowdhury states. "Even as the economy begins to recover in 2010, effective cashflow management shouldn’t become any less crucial."

Owen sounds a cautionary note as she predicts: "Insolvencies will increase as we come out of this recession, as interest rates increase, values become firmer and banks can reclaim monies with less of a write-off to their reserves. Effective management of a business should never be dependent upon the wider economy."