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Improving Cashflow | ||||||||
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No matter how good the product or service the company offers it cannot survive if the cashflow is not right. By right we mean able to be financed and forecast correctly. The excitement of expansion and new business sometimes causes management to forget the cashflow issues and this can lead to most unfortunate events. A good plan of action involves:
Cashflow AnalysisEspecially if you wish to grow your business you must be able to forecast your cashflow correctly. It is important the analysis identifies the peaks and not just the balance at a specific time in the month. Depending on the nature of your business the difference between the two can be extreme. If you need help with your cashflow analysis and forecasting get in touch. In most cases the cost of getting it right is not that great, the cost of getting it wrong can be enormous. Methods to reduce cashflow requirementsThe mindmap below shows some of the simple ways that reduced cashflow can be achieved. Click on any of the arms of the mindmap to see the related text  Reducing Debtor DaysAn important way to reduce cashflow is to reduce the number of days credit taken by trade debtors : usually referred to as debtor days. A company with £1m turnover is using up over £2,700 for every debtor day outstanding. Reducing the debtor days for a £1m company by just 5 would free over £13,500. This might get rid of a bank charge or expensive overdraft facility. It is our experience that companies consistently underestimate their true debtor days and overestimate the number of debtor days common for their business sector. This leading them to believe, wrongly, that they cannot improve their debtors days. There are ways to reduce the number of debtor days which nearly all existing customers find acceptable. After all, the chances are that your customers are facing the exact same problem themselves. The most important factor is that customers believe there to be a consistent policy and that they are treated fairly and the same as everyone else. The majority of problems arise where a policy is applied inconsistently. Bad Debt and Overdue Debt RecoveryReminder: Sig Biz Advisors works within the UK. The information on legislation and on-line pursuit of bad-debtors is specific to the UK. Whatever the terms of business offered most businesses face a problem with some who can't or won't pay. If you have relatively few, but high value customers who are slow payers. but who do eventually pay then it may be possible to build this into the pricing for them. In other cases then you need a clear policy consistently applied. For smaller businesses it may well be the most efficient to move overdue debts promptly to specialised collectors when the debts are 2-3 months overdue. The longer you wait the harder it is for anyone else to collect. You can claim interest in debts owed by businesses under the Late Payment of Commercial Debts (Interest) Act 1998 at the rate of the official dealing rate of the Bank of England on either 30th June or 31st December + 8% from the date when interest started to run to the date you are issuing the claim and continuing at the same rate up to the date of judgment or earlier payment. Pursuing Claims On-LineCommercial debts can be pursued on-line through the governments' Money Claim on line internet site. Depending on the size of debt there are different streams with differing procedures. Any debt in excess of £100,000 automatically requires your presence in court. To learn all of the details follow this link : Money Claim OnLine. Controlling Debtors LedgerWhatever the size of your business, managing the accounts and identifying overdue accounts is something that should be a daily activity and not saved up or delayed. It is important to follow up the customer up promptly by phone if overdue. If this does not resolve the matter then resort to letter. (If you need standard wording for the letters let us know). Sensible automation is very important. There are many accounting packages available. In general the cost of the right system for your business represents a very small part of your turnover and total costs. The right package will save you far more than it costs both by managing your debtors ledger effectively and by keeping human costs in administration to a minimum. To gain the most efficiency from the accounting package do ensure the staff are trained to use the package correctly. If you need unbiased advice on the most appropriate accounting package then let us know. A qualified person can review your needs and make unbiased recommendations. Some of the most common problems we find - and sort - is that of not controlling the debtors ledger and / or allowing too long credit to debtors. Many companies have grown over time and still rely on informal systems or untrained staff to follow up on overdue accounts, set account credit limits and the like. They argue that this is all they can afford to do. You cannot afford not to sort these problems. The majority of companies over-estimate the trade terms competitors offer and the importance customers put on long credit terms. Research shows that in most cases providing customers believe they are being treated fairly and in a similar manner to everyone else they understand the need for sensible and not too long terms to pay. Sales FinanceIn this context we are talking about the ways to finance the business through the period between the making of the sale and the money in the bank. The most widely used methods are Factoring and Confidential Invoice Discounting. In both cases the finance company will advance a percentage of the amount invoiced, but not yet received. The main difference between the two systems is that with factoring the factoring company generally will issue the invoice using their name, arrange for payment into their bank account and will be responsible for the follow up of any late payment. With Confidential Invoice discounting the work is generally done under your name, irrespective of who actually carries out each stage. In recent times there has been a series of variations on the two traditional services further blurring the roles of the two parties. Banks are keen to encourage businesses to factor of discount using their own subsidiaries. This is both from a profit motive and because it offers the bank a stronger security position than they might otherwise have. Other providers of these services may offer more lower rates, advance a higher percentage of the amount invoiced and offer a higher level of service so it can pay to shop around. Feel free to contact Sig Biz advisors if you want to gain competitive quotes from other sources. Note that Scottish Law is quite different to English in this area and if you are working both sides of the border it is important the right contracts are used in all instances. Reducing StockFor many businesses stock analysis MUST be a continuous process. If not managed properly this can be crippling for a business. There are simple analysis that can be carried out which allow you to track the level of stock as a ratio so that you not only see what it is at a moment in time but can see the trend. If parts stock is too high then understand what is causing the problem. Are there a few high value items that are slow to turn around for example? Make sure you are not paying for someone else's problem. If you are involved in stocking spares or other parts for something you don't make then push for better delivery from the manufacturer so that you don't need to keep the part yourself. There are many excellent overnight delivery services. Would it be cheaper to have the part shipped when needed? If finished goods stock is to high then consider carefully why this is, and what downside exists if any, of reducing this. Demand is never even, and there can be many reasons for carrying some finished goods stock. Look at the trends in stock, high and low points and make your decisions. If a customer insists on such tight delivery times from order that this requires stock to be held understand the cost of this and make sure it is reflected in our pricing. Be ruthless with obsolescent and out of fashion items also. Increasing and utilising fully trade creditThis might sound so obvious that you wonder why it is mentioned at all. The questions to ask yourselves are:
The fact is that we regularly meet businesses that are either paying heavily for their current borrowing or in difficult negotiation with their bankers and yet COULD REDUCE THEIR CASHFLOW REQUIREMENTS BY UTILISING THEIR EXISTING TRADE CREDIT. | ||||||||
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