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Ask The Experts > Cash Flow Control

If you control your cash flow, you have mastered one of the keys to a successful business because cash flow problems are the major cause of business failure (70%) within their first year.

How can you ensure that your business develops & maintains a healthy cash flow now & in the future? If you are aware of the many dangers that can pose a serious threat, you're one step ahead.

Above all, all businesses need cash flow forecasts. It is essential that you monitor and analyse your financials and use this information to forecast and budget on an ongoing basis.

The main causes of cash flow problems:

  • Debtors
  • Creditors
  • Too much debt
  • Rapid Growth
  • Temptation to Over-Invest
  • Excessive Stock Levels
  • Market Changes

Debtors?

  • Offering credit to customers (usually a necessity) is one of the major causes of poor cash flow because, when customers fail to pay at the agreed time, cash flow is significantly affected. Therefore, you need to ensure you have a good management system using budgeting and cash flow forecasts, a good credit policy and effective credit control.

  • Large debtors seem great but remember that they often demand long credit terms.

  • Failure to keep control of your debtors is one of the main causes of having bad debts. You must follow up immediately any late payers, whilst still maintaining good relations with customers.

  • An effective option in cases where a business is growing and profit is propping up the debtors ledger is to consider debtor finance.

Creditors?

  • Credit is useful to retain cash flow within a business. Everyone takes credit where it is offered, but having too many creditors can prove fatal.

  • If your payment to creditors is dependent on whether your debtors pay you on time, this could result in you failing to pay off your debts and, consequently, you could be faced with heavy interest charges, blocked further credit and damage to your reputation.

  • Some creditors may demand payment up front and won't give you time to pay, e.g. letter of credit.

  • Possible solutions: Purchase order finance, import finance, stock finance or debtor finance.

Debt?

  • Borrowing costs money (mainly through interest rates) and so it is important that you acknowledge these charges (including terms & conditions) whenever you apply for finance. You should also assess all the implications (i.e. affects to your cash flow) before you sign the contract.

  • Solution: Talk to people who understand the fine print - the wrong option could be very costly.

Growth?

  • When a business sells more than it can fund/generate (re current cash levels), it is over-trading.

  • If payment is received at sale point (i.e. no credit is offered), the risk of over-trading is reduced. When credit is involved, the effect on cash flow can be disastrous.

  • Careful control and management is needed because providing credit is costly.

  • Failure to meet payments on money borrowed will be painful - it may be influenced by your debtors failing to pay you on time...

  • Over-trading is more common with small businesses, particularly during their early stages where they seek and experience rapid growth - steady growth is the key.

  • Look for finance facilities that support and help you manage your growth. Debtor finance is one solution that should be considered to fund rapid growth.

Temptation to Invest?

  • When you have excess money available in your business, it is tempting to invest it (i.e. purchase assets, e.g. machinery, vehicles, premises, etc).

  • This can often be a reason for business failure. It is good management to have funds available should conditions change or any unexpected costs be incurred.

  • Be aware that over-investing in assets may leave your business short of cash and unable to finance daily operations and unexpected costs (late payment interest, equipment breakdowns, tax demands, etc).

  • Leasing should be explored to bolster cash flow.

Excessive Stock Levels...

  • Bulk buying can seem beneficial at times, but holding excessive amounts of stock ties up money in unproductive assets, particularly if the stock turnover is slow. (Storage costs also need to be considered when buying in bulk.) If you stock raw materials and/or finished products, effective stock control is the key.

  • It may be wise to consider options for funding stock before depleting your cash flow.

Market Changes

  • Even if demand for your service/product doesn't vary significantly enough to affect your cash flow, the possibility should never be overlooked. It has happened to many businesses, although most are no longer around.
  • Although this issue can often be unforeseeable, it can be accounted for with appropriate market research and effective marketing to maintain a steady demand to keep your business successful.
  • You might think that your customers are financially strong but changes in the market may quickly turn this around and you are left exposed. A simple credit insurance policy can save you.

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