The Cash Flow Conundrum


As any small business owner, or even big business manager, would know – cash is king. And at times, cash flow management is a constant battle. As an easy description: cash flow management means delaying payments of cash as long as possible while encouraging anyone who owes you money to pay it as quickly as possible. Following is some key tips to managing your cash flow.

What you measure, you can improve
Prepare cash flow projections for next year and next quarter and perhaps if things are tough, next week. An accurate cash flow projection can alert you to trouble quickly and before it strikes.

I’m yet to meet a Manager with a crystal ball, so it’s important to understand that a cash flow projection isn’t a glimpse into the future, it’s an educated guess on what’s likely to unfold. To make it as accurate as possible, it’s best to take into account your customers’ payment histories, a thorough examination into upcoming expenses (regular and irregular) and your debtor’s patience – does 7 days really mean 7 days? Make sure you take into account any change in seasonality of your business, capital expenses, loan interest and any principal payments.

Improving your cash flowing in
If you got paid for sales the instant you made them, you would never have a cash flow problem. Unfortunately, there are very few business models that enable this, so you can manage your cash flow by improving your receivables.  Here are a couple of things you can implement to do so:

  • Request a deposit upon ordering / signing a contract
  • Offer  discounts or incentives to customers who pay their bills before they’re due
  • Require credit checks on all new noncash customers.
  • Sell off  any outdated inventory for anything you can get.
  • Issue  invoices promptly and follow up immediately if payments are slow in coming.
  • Institute a policy of cash on delivery (c.o.d.) is an alternative to refusing to do business with slow-paying customers.

Managing your bills
Sales growth can hide a multitude of sins. When your business is growing, you have to watch expenses carefully. Don’t be lulled into a false sense of security by expanding sales. If you see expenses growing faster than sales, examine costs carefully and see that there is no underlying problem. Here are some tips to helping you control your cash flowing out:

  • Take full advantage of payment terms. If a payment is due in 30 days, don’t pay it in 15 days. When paying use EFT on the last day, so you remain current but still get full use of your money before paying.
  • Good communication with suppliers is key. If you ever need to delay a payment, you’ll need their trust and understanding.
  • On the  flipside to our earlier recommendation, carefully consider early payment discounts or offers. They can go one of two ways: an expensive loan to your supplier – or a brilliant way to cut costs – read the fine print.
  • Don’t always focus on the lowest price when choosing suppliers. Sometimes more flexible payment terms can improve your cash flow more than a bargain-basement price.

Surviving the hard times
There will be a time when you find yourself in a situation where you lack the cash to pay your bills. First and foremost – this is not a failure on your part as a manager or business person – you just can’t predict the future. There are easy ways to manage a shortfall and the key is to become aware of the problem as early as possible.

Lenders are wary of borrowers who have to have money today. They’d much prefer lending to you before you need it, preferably months before. When the reason you are caught short is that you failed to plan, a banker is not going to be very interested in helping you out.

The easiest way to manage shortfall with a bank is to apply for a line of credit. This MUST be planned for early, as it takes a little time to set up and the bank won’t help you when you’re short already.

The next step is to go to your suppliers, they’re far more invested in your business thank the bank. You can often get extended terms from suppliers that amount to a hefty, low-cost loan just by asking. That’s especially true if you’ve been a good customer in the past and kept them informed about your financial situation.

Like with suppliers, having good relationships with your clients is also beneficial, not just for your business brand, but also your finances. Ask your best customers to accelerate payments. Explain the situation and, if necessary, offer a discount. Also go to your debtors who are more than 90 days past due. Offer them a steeper discount if they pay that very day.

You may also be able to bring cash in by selling and leasing back your assets. Leasing companies may be willing to perform the transactions. It’s not cheap, however, and you could lose your assets, like machinery, office furniture and equipment, if you miss lease payments.

When it comes down to it, choose the bills you pay carefully. Make payroll first-unpaid employees will soon be ex-employees and you could find yourself in a legal battle. Pay crucial suppliers next. Ask the rest if you can skip a payment or make a partial payment.

Ultimately, planning is key and your accountant can help you with this. If you have any questions, please call us on 07 5531 1288 or send us an email.

The advice provided in this blog is general advice only. It has been prepared without taking into account your objectives, financial situation or needs. Before acting on this advice you should consider the appropriateness of the advice, having regard to your own objectives, financial situation and needs. The information in this blog is no substitute for financial advice.


Scotia Online CIBC Online