Steven Mugglestone

The more I learn, the less I know

Cash flow worries for many small businesses yet most do not systematically manage their cash and working capital

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Nearly half of all small and medium-sized business owners in the East Midlands are worried about their cash flow over the next 12 months, according to a survey by banking group Santander.  A total of 42 per cent of the East Midlands business which responded to the Santander study reported they were “worried” about cash flow, with a further 15 per cent saying they were “very concerned”. 

Late or failed payments from customers were given as the main reason for cash flow issues followed by weak product sales and customer demand.

Despite all of these worries, and before finding alternative sources of finance, we find that many businesses do not systematically mange their working capital and cash, as many do not have the help and resources available to have an experienced Finance Director as part of their team.  We are finding that we are dealing more and more with hands on management support for our business clients and new clients, as they have not received this support and help from their own accountants.

Instead of worrying, there are a number of systems and improvements that can be put in place to really help improve cash flow and put the business owner back in control.  These include:

  • Ensure that you have a rolling 13 week cash flow, updated weekly, to ensure that you can foresee the peaks and troughs and overall requirements and start to manage your cash flow.
  • Actively manage key working capital areas, ensuring that you understand your stock and debtor levels and requirement/supply times.
  • A back to basics understanding of their own gross margins and profitability to understand that, whilst cash is king, selling less of more profitable goods and services may be better than selling volume of less profitable.
  • Many businesses still hold too much stock and, in particular retail businesses, seasonal and fashion changes will mean that stock held at the end of season will need to be significantly discounted, significantly reducing profitability as well as tying up cash for the period.
  • Many businesses still do not have a systematic and written credit control procedure.
    o   Ensure that customers accept their invoices as soon as possible and deal with any problems immediately.
    o   Ensure that you have an appropriate contract with all customers and that credit control and credit policies are included in that contract.
    o   Ensure that there is a system of letters and calls and stick to that.  Keep in contact with your customers who owe you money.  Sometimes you may need to solve their cash problems by introducing finance to them.  Many businesses have access to providers of finance for their customers.
  • Keep communicating with your suppliers and creditors, ensuring that you obtain the best credit terms but do not leave them in the dark, which may result in cessation of supply and court action.
  • Keep communicating with your bank, as neither side like surprises and they may be able to help and/or compromise

·         There are alternative sources of finance available and many businesses are missing out on effective alternative financing solutions, such as invoice or supply chain finance and in doing so opening themselves up to cash flow volatility.

It is quite remarkable that nearly half of businesses are concerned, but have not either sort or been offered help from their own accountants.  This is partly the difference in experience and commercial approaches that real business advisers provide.  If you are a business facing this challenge, please do make contact with us and we will help to provide support and some of the answers to you.

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Written by Steven Mugglestone

May 2, 2013 at 8:37 am

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