CASH FLOW IS KING

Cash flow is the essence of business and a crucial part of controlling and managing your company. Linda Pearson reports.

Cash comes from sales, collections of account receivables, and the sale of assets. Cash also flows out to meet all expenses and debt obligations of the business. The purpose of successful cash flow management is to have enough cash on hand when you need it. This may seem like a simple theory, but it is not as easy as it sounds. Many business owners do not give cash management a second thought as long as more money is coming into the business than going out. However, that train of thought leaves owners exposed to all kinds of cash flow crises.

It is crucial that structured cash flow is maintained in any business, and spending time to manage cash flow is definitely worth it.

Importance Of Smooth Cash Flow

It’s vital that any profit and loss and cash flow projections are based on reality as opposed to aspirations and that they reflect all aspects of the business.

If all these projections are realised, it can help a business expand in the days ahead and minimise expenses incurred in unnecessary bank overdraft facilities and credit arrangements. Ultimately, organisations that improve the manner in which they receive and expend cash will be more successful. They will also be able to increase their income.

Consequences Of Neglecting Cash Flow

The unfortunate truth is that many businesses don’t manage cash flow efficiently from the outset and neglect their cash flow until it is too late to recover. A shortage of cash flow could result in the loss of valuable trade discounts or, in extreme circumstances, financial embarrassment and bankruptcy. Fiona Farrell, assistant manager with Anne Brady McQuillans DFK chartered accountants and business consultants believes that, “in a lot of cases nothing gets done until the Revenue Commissioners are sending you letters saying your VAT returns are late and then you have to go looking for an accountant at the last minute. If you are only looking at things at the very last minute, it is often too late to fix it.”

Tips For Maintaining Successful Cash Flow

Have realistic sales projections Maintain sensible levels of stock purchasing Good debtor management Good creditor management Plan ahead with cash flow forecasts

It’s naïve to think that only recently formed companies will suffer the symptoms of cash flow crises because a business can run into difficulties even if it has been profitable for years. A business can find itself in difficulty at any stage when it runs out of funds temporarily because of over expansion and being unable to pay the bills or employee wages. The time lag between the business paying suppliers and employees and when customers actually pay you can be a problem for most businesses at some stage and the solution to this problem is managing the cash flow.

It’s imperative that turnover, profit, margin, operational issues, financing and cash are all monitored and effectively managed or the cracks will begin to appear and the warning signs of cash flow crisis will begin to shine brightly.

Cash Flow Solutions

Today’s world is a busy demanding place and managers are under increasing pressure to juggle many aspects at once. Managers must deliver high quality products, ensure customer satisfaction, ensure deliveries are received on time, and maintain good bookkeeping practices to name but a few of their ongoing duties. Because of this time pressure, a business’s cash flow may suffer. There are several methods managers can introduce to make the process of cash flow run more smoothly.

Diarmuid O’Connell, partner with HLB Nathans Chartered Accountants and Auditors has valuable advice on how to manage cash flow and prevent insolvency. Cashflow should be controlled by having a proper budgeting system and credit control system. In my experience, the companies that have a systematic, planned and consistent approach on the follow up to the moneys that are owed to them do not run into cash flow difficulties in general. Having a plan and system in place is vital,” says O’Connell.

“There are a number of avenues open to companies experiencing cash flow problems. Take control of your own cash flow problems rather than out-sourcing the solution to the problem. Too often companies seek to out-source the solution whether it’s getting the bank to bail them out, getting overdraft facilities or other loans or invoice discounting,” he continued.

According to Tom Kavanagh of Kavanagh Fennell, a firm that specialises in corporate recovery, “the skill set that you need in a crisis is a ‘baton down the hatches’ skillset. In other words, you need to have no fear of cutting costs, of making hard decisions, of not pursuing certain angles of the business which are unprofitable, of having to let go a certain amount of staff and of pulling out of one or two premises that are superfluous. You have to be good at defence. When you’re in a crisis it’s not the time to attack but the time to defend.”

Methods to Use

There are many methods which can be employed to keep cash flow stable and hence steer away from insolvency. Some of those are depositing checks fast, keeping your money in your hand for as long as possible, bill promptly, trim your inventory, issue invoices promptly, and create incentives for faster payment to you.

Ideally, staff, management, and board members of nonprofits should develop a ‘cash flow awareness.’ Everyone in your organisation can help improve cash flow by understanding the relevant issues. Staff and management at every level can become more involved in improving cash flow if cash flow issues are regularly addressed.

O’Connell emphasises the importance of invoices in relation to keeping a regular cash flow. “Too often invoices are issued but no one is following them up and there is no systematic approach to getting the cash in. It’s the company that rings them up every week looking for the cheque that will get paid. Persistence pays off.” Farrell believes it’s imperative a company suffering a cash flow crisis seeks help and doesn’t bury their head in the sand.

“Talk to your accountant, bank manager and creditors and ask them for advice. They will offer you a number of services to help you with cash flow problems. Don’t be afraid of the cost and get a quote upfront. Whatever you do, don’t just bury your head in the sand. The sooner you address the problem, the easier it’s going to be to solve. As soon as you recognise there’s a problem get advice,” advises Farrell. The assistant manager also stresses the importance of getting financial advice before starting a business. “It’s crucial to get financial advice when you are starting up a business. If you know about finance then that’s great but 99% of companies don’t know about finance. These companies need advice and it doesn’t have to cost the earth. If you don’t you could have a monkey on your back without even knowing it.”

Insolvency Turnaround

To determine whether the company is insolvent, a review should be carried out to see if the company can meet its liabilities as they fall due for payment and if they have detailed cash flow projections to back this up. If the review concludes that the business is worth saving then the next step is to develop an appropriate recovery strategy which includes financial reconstruction.

Kavanagh believes, “businesses can turn insolvency around and make it profitable again. Ultimately, it’s down to the quality of the management to get themselves out of a crisis. If the will is there on behalf of the management and if they work together with the recovery expert then it has every chance of success. Where you see companies fail it’s because the quality of the management isn’t good enough to get the company out of a hole.”

Examinership is a process whereby the protection of the Court is obtained to assist the survival of a company. It is quite a technical procedure and is not widely used. It is an option available to an insolvent company that enables it to explore all opportunities to provide for its survival. On average only 2% of insolvent companies in Ireland enter examinership. However, in the period 2004 – 2006, 93% of companies that entered examination emerged successfully.