Cash management

Cash is the life blood of your business. If it’s not flowing your business will die.

Some simple rules:-

If you are just starting out be prepared to pay more for your raw materials for favourable credit terms. Or buy smaller amounts more regularly. You can buy in bulk to get a discount only if your cash position is strong enough to allow it.

Unused or slowly rotating stock is cash tied up.

Agree clear payment terms with your customers. 30 days should be your maximum but if your customer insists (sometimes large businesses can demand 60 days) then you will need to try and agree the same terms with your suppliers relating to that sales order.

Invoice immediately. As soon as your contract to supply is fulfilled raise a sales invoice. If it’s a large amount relative to your business (be gentle) phone the customer after a week and ensure they have received the invoice, ask have they authorised the invoice and have they got a payment date.

Ensure the customer has your correct bank details. Try and discourage being paid by cheque.(They can bounce)

There’s nothing wrong with using Invoice Finance or Invoice Discounting, providing you negotiate a reasonable rate with the lender.

Don’t be afraid of purchasing capital items on finance or lease. If you are going to run a van for four years, pay for it over four years. If it’s an expensive machine that will last at least 10 years then why pay up front out of working capital.

Cash Flow Diary:-

The main report I use to control cash is a cash flow diary using excel. I’ve come across different versions of this in a variety of industries and that business always seems to be in control of their cash.

Start by having a daily analysis for at least the next two months then after that just a monthly summary up to say 6 months forward.

You know what day you pay your wages/salaries and you know what day you pay HMRC your PAYE so put them in.

You should have a schedule of your Direct Debits and Standing Orders, if not create one. Put these in on the relevant day.

You know when you have to pay your lease or mortgage on your building so put that in.

You know when the V.A.T payment is due so put that in. (It’s easy if you have a regular turnover not so if you have project work)

For your sales receipts, be pessimistic. You could enter what you expect to receive in the month all to be received on say the 25th. If you have a list of these it acts a simple driver for credit control.

Once you know how your cash flows in and out through the month you can calculate your purchase ledger payments. I like to be inconsistent when paying suppliers. Never pay absolutely on time but delay by a week, a day, maybe two weeks then if you are struggling to pay they won’t immediately notice if you are late.

Allocate an hour every morning. Print off your bank statement and update your diary. Do it first before anything else. Before you open Outlook and get distracted. You’ll be surprised by how much more in control keeping this diary makes you feel.

Ensure a good night’s sleep and appoint an experienced individual to manage your cash for you.