The current recession is certainly having an impact on most businesses. It puts owners on high alert and creates sensitivities within business that now need close and regular attention. None more so than cashflow.
Cash management is the cornerstone for any business’s survival, so it becomes an important area to constantly monitor, revise and adjust to account for a changing and volatile business environment. A lot of business owners endure sleepless nights thinking of how to manoeuvre through a myriad of cashflow obstacles, sometimes just to see themselves through to the next week. Not everyone has deep pockets which makes keeping on top of your cash position a real challenge.
Cash management doesn’t just mean what’s in the bank, it means effective management of most other elements of the business as well.
For example: A fresh and current Sales pipelines, sound inventory management practices, disciplined project management with constant monitoring, and of course low tolerance levels for debtors that are slow to pay. Just from that small list alone, it’s obvious the influence each can have on a business’s cashflow: slow conversion of opportunities into tangible sales directly impacts revenue levels, the overstocking of inventory lines means cash is unnecessarily tied up in assets, the wasteful management of projects can see them bleed money, and poor attention to Debtors operating outside of their terms can put at risk their eventual collectability. All can quickly turn a favourable position into one of extreme stress.
Speed and consistency of ‘cash conversion’ is key. Owners should be constantly looking at how quick they convert leads into sales and then into cash, how long stock sits around before being sold, and how effective they are in managing their specific supply chain. Managing the risks associated with each of these becomes critical to managing cash well.
So what should that be done to manage cashflow in a tightening market?
Stock levels and product range – do you have the right levels, are they moving quick enough, do you need to narrow your range and maybe order some types only on demand. Slow-moving and low-margin stock drains your working capital.
Recognise and understand and risks impacting your supply chain. Owners shouldn’t be afraid to actively seek out alternative suppliers or products to alleviate some of these risks.
Tighten trading terms and conditions for two reasons - ensuring cash comes in as quick as possible, and that you have a clear approach to managing those that don’t pay quickly. Insisting on deposits from customers for large advanced orders is also now more common.
Overdraft and trade finance facilities - invoice financing are all tools to help develop buffers or speed the conversion of sales to cash. A bank manager who understands and supports your business certainly helps too.
The variable costs of a business should all be closely monitored and challenged – is it necessary or is it simply a nice to have.
Introduce cashflow forecasting – anticipated sales based on an activated sales plan, identify the characteristics of fixed and variable cost activity through to the timing and sensitivity of receipts and payments. It’s an early warning system that provides time to then formulate a plan or options.
Cashflow management isn’t a straightforward science. If managed well the system of managing cashflow provides a business with resources to create new opportunities or cement existing. If not managed well, the system itself often becomes the central focus of the business, forcing owners away from what they are good at and continuing that cycle of sleepless nights.
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