Cash Flow Management
Part of the business of providing finance for your working capital requirement is actively managing the cash flow. In practice this means managing your working capital. The Elements of your working capital are
- Stock
- Work in progress
- Debtors
- Expenses paid in advance
- Creditors
Each of these elements eventually translated into cash - the first four represent cash going into your bank, the last, cash going out. Therefore you must manage all of these items to ensure that you can keep within your bank overdraft facilities..
Stock
Make sure that you do not carry too much stock. The cost of carrying too much stock is seen in three ways:
- The cost of financing the stock itself
- The risk of obsolescence, loss or damage
- The cost of storage
You will undoubtedly need to carry many different lines. Each of these must be controlled. Your business could suffer through being either understocked or overstocked.
If your business is retail or wholesale selling, this item is particularly important. Make sure you know which items are selling. If there are any lines which are not selling, find out why - is it something to do with the way they are displayed, the pricing, or general demand? If something is selling well, again try to find out why. It could just be that you have made a mistake in pricing, and are actually selling them at a loss.
If you are manufacturing, you need to know what quantities of raw materials you need, when you need them, and what the 'lead time' is (i.e. the delay between ordering stock and its delivery to you). Whatever your business, set maximum and minimum levels of stock, and the lead time.
Work in Progress
Try to keep this at a minimum at all times. If your business is particularly complicated, or you have many individual items of work in progress at any one time, active management is needed. Make sure that no items get overlooked and are lost in progress. Make sure that no deadlines or promised delivery dates are going to be breached.
Remember that time is money. As long as work is in progress and not completed, the money is not in your bank account.
Debtors
Once the goods have been sold, the money is still not in your bank account. The customer becomes a debtor, and still has to pay you. There are several ways of managing your debtors.
Discounting
One way of encouraging customers to pay quickly is to add an amount on to all your prices, say 5% and state on your invoices 'Discount of 5% may be deducted if paid within. . . days.' Customers will of course realise that you have loaded this amount on the price in the first place. If they object, simply explain that you do not think it is fair that the customers who pay on time should be financing those who do not pay on time.
Interest
If your terms of business allow for it, you may charge interest on overdue accounts. The customer must be made aware of this. However, since the Late Payment of Commercial Debts (Interest) Act 1998, small firms have the legal right to charge interest to large firms who exceed their credit terms. Since November 2002, all firms are able to charge interest to any other firm.
Factoring
This is a service carried out by finance houses and banks. The factor 'buys' your debts from you, paying a high percentage up front, say 80%, and paying the rest when the debts are paid in full. For this, they charge a fee.
Invoice discounting
This is similar to factoring, but in this case, all that is supplied is the financing facility against invoices. A discount rate is applied, and you get that discounted amount of your invoices.
Credit control
Controlling your debtors is an important part of managing your cash flow. Perhaps confusingly, this is known generally as 'credit' control. You should exercise some form of control at all stages of the process of selling and collecting the debt.
Creditors
Do not take excessive credit from your creditors - they supply the essential goods and services you need to operate. Make sure you know the terms of business with your creditors, and if you need extra time to pay in unusual circumstances, try to negotiate these individually.
