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