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.

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

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

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

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

Inventory:
Reduce inventory (stock) levels and improve control over WIP
Sell off or return obsolete/excess inventory

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

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

Bank Reconciliation

Bank Reconciliation
What Is A Bank Reconciliation ?
Bank reconciliation is the process of matching and comparing figures from accounting records against those presented on a bank statemet. Less any items which have no relation to the bank statement, the balance of the accounting ledger should reconcile (match) to the balance of the bank statement.
Bank reconciliation allows companies or individuals to compare their account records to the bank's records of their account balance in order to uncover any possible discrepancies.
Since there are timing differences between when data is entered in the banks systems and when data is entered in the individual's system, there is sometimes a normal discrepancy between account balances. The goal of reconciliation is to determine if the discrepancy is due to error rather than timing.

Comparing The Bank Statement To The Cashbook

When all of receipts for a period have been written up in the cash receipts book and all of the cheque payments, standing orders and direct debits have been entered into the cash payments book, it is necessary to carry out any further checks possible on the cashbook. The most obvious check is to compare the entries in the cash receipts and cash payments book for the period, to the entries on the bank statement, although some care does need to be taken here.

Debits and Credits
One of the most obvious differences between the cashbook and the bank statement is that the use of the terms debit and credit appear to be totally opposed to each other.
If cash is paid into the bank by a business then for the business this is a receipt and is entered in the cash receipts book as a debit entry. However, in the bank statement this will be described as a credit and the balance will be a credit balance. This is due to the fact that if a business has money in the bank, the bank effectively owes the money back to the business and therefore the business is a creditor to the bank.
Similarly, if the business writes a cheque out of the business bank account this will be entered in the cash payments book as a credit entry. From the bank's perspective however, this is known as a debit entry and any overdrawn balance is a debit balance.

How To Do A Bank Reconciliation
Summarised, the procedure for performing a bank reconciliation, in four simple steps:
Pre Bank Reconciliation Example

Compare the cash receipts book to the receipts shown on the bank statement (the credits on the bank statement) - for each receipt that agrees, tick the item in both the cashbook and the bank statement.
Compare the cash payments book to the payments shown on the bank statement (the debits on the bank statement) - for each payment that agrees, tick the item in both the cashbook and the bank statement.
Any un-ticked items on the bank statement (other than rare errors made by the bank) will be items that should have been entered into the cash books, but have been omitted for some reason - these should be entered into the cashbook and then the amended balance on the cashbook can be found. To find the correct cashbook balance a ledger account is used for the bank with the original cashbook balance shown as the brought forward balance and any additional payments shown as credits and receipts as debits. This is illustrated in the example.
Finally, any un-ticked items in the cashbook will be the timing differences - unpresented cheques and outstanding lodgements - these will be used to reconcile the bank statement closing balance to the corrected cash book closing balance.

Post Bank Reconciliation - Completing The Double Entry
Opening Balances On The Cashbook & Bank Statement
In our example you may have noted that the opening balance on the cashbook agreed with that of the bank statement - there were no unpresented cheques or outstanding lodgements at the end of the previous period.
This will not always be the case. If there were timing differences at the end of the previous period, then a bank reconciliation statement would have to be prepared. When comparing this period's bank statement and cashbook you will need to have the previous period's bank reconciliation statement in order to be able to tick last period's timing differences when they appear on the bank statement this period.

Conclusion
When Anne is preparing her bank reconciliation at the end of April, she is likely to find that the unpresented cheques at the end of March, cheque numbers 103572 to 103574 do appear on the bank statement in April. When they are found on the bank statement in April, they should then be ticked on the bank statement and on the opening bank reconciliation statement. The same will happen with the two outstanding lodgements at the end of March, when they appear on the bank statement in April.