The first priority of any financial management must be cash. This cannot be any more relevant than in the current climate, where banks are tightening their lending and revenues are so uncertain. Cash is the lifeblood of the organisation and is the real bellwether for the health of a company. Profit is not the same. Plenty of profitable companies have gone bust due to lack of cash.
What can go wrong?
- Sales revenues are optimistically forecast, and are not delivered
- Uncontrolled purchasing leads to too much stock
- New business and fast growth lead to cash being sucked into working capital
- Large one off payments such as VAT are poorly planned for (NB: more businesses are closed due to debts owed to HMRC than anyone else)
Ultimately, banks can withdraw support and the company goes bust
So, what should you do to ensure this doesn’t happen to you?
Reconcile your bank account at least weekly and probably daily.
- You must know what is in the bank at any stage.
Prepare cash flow forecasts for the short and medium terms.
- You should have a short term cash flow that looks at the inflows and outflows for your bank accounts for the next 16 weeks minimum. It must be either a daily or weekly cash flow, depending on how well you can control receipts and payments on day to day flows.
- You should then have a medium term cash forecast that looks forward 12 to 18 months in advance, that is tied into your budget and forecast P&L model.
- These forecasts need to be measured against your bank facilities, and you need to have some headroom, since things can go wrong.
Everyone in the business should be aware of how they impact cash. For example;
- When buyers agree terms with new suppliers, they often give away payment terms for margin gains. Finance must set clear guidelines on what is negotiable or not.
- There should be cash limits of stock purchases each month.
Sales staff should only ever be rewarded on the basis of sales receipts not customer orders generated.
Plan for seasonal activities
- Keep stocks to a minimum
- Dispose of slow moving stocks
- Be prudent with forecasting customer receipts. (What would happen if your largest customer failed to pay for 2 to 4 weeks after due date?)
Control expenditure
- Reforecast expenditure on a monthly basis and hold managers accountable.
- Make sure that purchase orders are required for all expenditure, and are as planned.
- Have clear authorisation limits.
The above is by no means exhaustive but, if you follow these cardinal rules, then there should not be any surprises. If there are problems ahead, you will at least have time to act.
The bank manager will be far happier to consider short term additional funding, if he can see you are in control, but have a short term temporary requirement.
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