CASHFLOW MANAGEMENT In association with AIB

Ann Murtagh, Business Strategist, AIB

Cash is the lifeblood of any business so business owners/managers have to keep it flowing. By focusing on three or four key elements of your working capital significant tranches of cash can be released, writes Ann Murtagh

Every business needs to know how much they are owed, by who, for what and for how long. Slow payment has a crippling effect on business. Every €10,000 outstanding in debtors that you finance by a loan costs your business approx. €750 p.a. to fund. If you don’t manage your debtors, they will end up managing your business as you gradually lose control due to reduced cashflow and increased incidence of bad debt.

Debtors

It is important to establish credit practices as a matter of company policy. Check out each customer thoroughly before you supply on credit - use credit agencies, bank references, industry sources. Once you have done that establish credit limits for each customer and continuously review these. Consider charging penalties on overdue accounts or offering discounts for early payment and consider accepting credit/debit cards, to make it easy for customers to pay you upfront. Don't let any one/small number of debtors get too big. Put your International Bank Account Number (IBAN) and your Bank Identifier Code (BIC) on all your invoices to international customers to make it easier for them to pay you. Keep track of your debtor turnover ratio. This is level of business sales compared to debtor levels. If it keeps getting lower this signals potential problems with your debtor management.

Debtors due over 90 days (unless within agreed credit terms) generally demand immediate attention. Look out for the warning signs of a future bad debt. For example:

» Longer credit terms taken, particularly for smaller orders
» The issuing of post-dated cheques
» Part payment by debtors
» Evidence of switching to additional/ different suppliers for the same goods
» New customers who are reluctant to give credit references

A customer who does not pay is not a customer. But when asking for your money, be hard on the issue, but soft on the person. Don’t give your debtor any more reasons to delay paying you.

Creditors

Creditors should also be managed carefully to enhance the cash position. An overzealous purchasing manager can create liquidity problems. It is important therefore to have a clearly defined purchasing process and have a competent staff member responsible for this.

Get quotes from at least three suppliers where possible and go with the one that meets your business needs at the best price. Check if suppliers offer discounts or credit terms and take advantage of these. Are you in a position to pass on cost increases quickly with price increases to your own customers? Before you purchase from a supplier, find out if you can have delivery of supplies staggered or on a justin- time basis and if they have a return policy for unused stock. If your supplier is delayed in making delivery, check if it is possible impose a penalty. Keep an eye on your creditor turnover ratio. This is the amount of sales compared to outstanding creditor amounts. If it keeps getting lower, it may signal cashflow problems. If it keeps getting higher, you may not be taking full advantage of credit terms on offer. It is also important that you look after you creditors. Slow payment by you may create ill feeling and can signal that your company is inefficient.

Cashflow Forecast

This is an ideal way of making best estimates of your future cashflow. At the start of the year develop a cashflow plan and continually review this, comparing it to actual cashflow figures. Problem areas will then be highlighted, allowing you to address them in a timely fashion. Fundamentally, the ability for a business to expand and grow is dictated by its ability to manage its cash effectively.