Cash Flow

Cash Flow

Cash Flow Problems

Cash flow is a big problem from many businesses.  Dealing with growth is a problem many small businesses would like to have.  But cash flow remains a problem.

A manufacturer of electrical security systems faced this problem in the mid-Nineties.  Turnover was growing at 20 per cent a year but the cash flow being generated was not enough to finance the expansion required to keep up with the increasing demand.

The bank that they were with at the time wasn't sufficiently visionary to fill the gap through traditional lending, so they were forced to employ a  factoring company to help fund the growth.

The arrangement worked well at first but problems began to arise because the business was becoming more distant to its customers.

The factor was collecting all their debts but it would disallow an entire invoice at the slightest suggestion of a query from the customer.  It could be anything as small as the post and packaging charge.  As their debtors can owe them anything between £20,000 and £100,000, this policy was denying them access to significant sums of money.

After examining different methods of raising finance, they decided invoice discounting was best suited to his business.

Ways of Improveing Cash Flow

Many business, especially those in their infancy, or those where a large proportion of the final invoice value has been pre-paid by the business on a client behalf, may find that cash flow can become a major issue.

Listed below, some possible measures which might be adopted in order to alleviate cash flow problems.

1. Sales Related:
   • Increase sales (particularly those involving cash payments)
   • Increase prices especially to slow payers
   • Review the payment performances of customers with sales force
   • Become more selective when granting credit
   • Seek deposits or multiple stage payments
   • Reduce the amount/time of credit given to customers
2. Costs & Systems:
   • Reduce direct and indirect costs and overhead expenses
   • Use the Pareto 80/20 rule to manage inventories, receivables and payables
   • Improve systems for billing and collection
3. Credit Management:
   • Bill as soon as work has been done or order fulfilled
   • Generate regular reports on receivable ratios and aging
   • Establish and adhere to sound credit practices - train staff
   • Use more pro-active collection techniques
   • Add late payment charges or fees where possible
4. Purchasing:
   • Improve systems for paying suppliers
   • Increase the credit taken from suppliers
   • Negotiate extended credit from suppliers
   • Use barter to acquire goods and services
   • Make prompt payments only when worthwhile discounts apply
5. Inventory:
   • Reduce inventory (stock) levels and improve control over WIP
   • Sell off or return obsolete/excess inventory
6. Investment:
   • Defer or re-stage all capital expenditure
   • Sell off surplus assets or make them productive
   • Enter into sale and lease-back arrangements for productive assets
   • Use leasing etc. to gain access to the use of productive assets
   • Defer projects which cannot achieve acceptable cash paybacks
7. Financing:
   • Use factoring or invoice discounting to accelerate receipts from sales
   • Re-negotiate bank facilities to reduce charges
   • Seek to extend debt repayment periods
   • Net off or consolidate bank balances
   • Defer dividend payments
   • Raise additional equity
   • Convert debt into equity
   • Make medium and short-term cash flow forecasts - update regularly

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