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What you need to know about cashflow…but were too bored to ask

Without the ability to meet the day-to-day demands from its suppliers for payment, a business may well find itself cut off from its essential inputs and face serious cash flow issues. For any business essential cost items such as trade goods, raw materials, employees – nobody works for nothing – and services such as light and heat all need to be covered to keep the business going. Keeping a tight rein on cash flow is important at the best of times. When the economy slows and the insolvency risk rises, it becomes absolutely essential.


First and foremost, business owners should be talking to their financial adviser on a regular basis in order to gain a full understanding of their business’ cash flow and to manage working capital. Assets need to be evaluated, liabilities assessed and all income and expenditure items should be critiqued line by line. Businesses need to focus activities in those areas where they are competitive and ensure that they ‘sweat the assets’ to the maximum extent possible.


The most basic problem at the moment is a lack of cash. Banks can’t and won’t increase the level of credit into a struggling business. Banks are lending but only in cases where the business is viable. Banks want to see owner’s funds in the business, not just banks and creditors. They want to see clear understanding and management of financial issues relating to your business, a strong monitoring system and a complete and accurate package of documentation.


Business owners need to keep a close eye on any unnecessary or discretionary costs. Full credit terms should be utilised, whether they are 30, 60 or 90 days, and where possible credit and pricing terms should be renegotiated with suppliers. Implement a defined purchasing process with responsibility allocated to a specific member of staff. Know the cost of carrying stock in your business, monitor turn over, and maintain the ‘right’ amount for your business so cash isn’t tied up in surplus stock. This may throw a much needed lifeline when times get tough.


Hire purchase agreements and leasing arrangements will prevent a business parting with valuable cash, especially when purchasing expensive stock and capital equipment. Again, look at pricing and payment terms with existing suppliers and switch if you feel you can get a better deal. Also internal policies such as travel and expenses should be routinely reviewed to expose inefficiencies.


When costs are rising it is important to have a predictable fixed income throughout the year. Prompt settling of bills should be encouraged by discounts. Regular customers can be put on monthly standing orders, settling any debts at the end of the year.


Cash outflow is something that can be accurately forecasted by controlling costs. You know that you’ve committed to rent, rates, light and heat, for example, and there is a certainty to those outgoings. It’s difficult to forecast the cash inflow unless you have contract work. You can predict the trend and analyse your minimum income, but it will never be accurate. For now you just need to keep a tight rein on expenditure and try to get new business from your customers.

In conclusion the outlook may be bleak and commentators tell us that business will have to plan for two and possibly three years’ of difficult, challenging times but those who take the appropriate actions now and manage their cash well will emerge from current difficulties in a much stronger position. Surviving business will be leaner, with cash retention, good monitoring systems and strong management.


Written by Suzanne Shaw, CPA Ireland

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