In the current climate, managing cash is the most important aspect of your business.  The old adage “cash is king” was never truer than in the current climate.  Yet most small business owners have focussed only on increasing profits over the last number of years.  Now that sales have dried up, and profits are being squeezed, it is a good time to focus on other aspects of the cash flow of the business.  If these are improved, then the profitability will follow.  

There are a number of critical aspects to managing your working capital.  Firstly, you must stay on top of the amounts owed to you by your customers, and have regular dialogue with each of them to ensure that you know their position and get paid on time. Bad debts not only impact on your profits, but also take up a lot of time; time which would be much better spent solving problems elsewhere in the business.

However, it is just as important to also speak to your suppliers about their payment terms.  Failure to pay them on time can impact not just on your ongoing business relationships, but also on your gross margin from lost discounts.

The third area of working capital control is the stock level.  It is important to consider the trade off between volume purchasing, and the cost of holding the stock.  The more stock you hold, the greater the risk of obsolescence or damage.  Stock levels should be monitored regularly, and any slow moving or damaged stock should be removed, and discontinued.  Also, you should consider the number of product lines being stocked; are 5 different lines required when 3 would do?  Decisions on seasonal stock levels need to be carefully considered also.

Dealing with the banks is another increasingly time consuming area. The level of detail which they now require has increased significantly, and the time it takes for loan approval has increased.  Even on existing facilities, the banks are looking for greater margin, which adds further costs to your business. 

Banks need to see that the organisation is well managed, and has a clear plan and budget in place to survive the recession. If the budget reveals that trouble is around the corner, then it is important to flag this to the bank well in advance.

They will also consider the quality of the management team, their track record and their ability to deliver the plans.    

If you have existing bank loans or are looking for loans to finance capital expenditure, then it is important that the term of the loan matches the “profit generating” life of the asset.  This is especially important if leasing or hiring equipment, as it impacts on your equipment replacement policy, as well as on your cash flows.

There are a number of practical ways of improving your cash flow, and to discuss these options, or any other aspect of your business, contact us today.