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What is cash flow management?

When it comes to a growing company’s financial management, cash is king. The problem is the lag time between paying your vendors and staff and the time you receive payment from your clients, Cash flow management is the fix at its simplest aim is delaying cash outlays if possible, while convincing someone who owes you money to pay it as soon as possible.

The projections for cash flow are not glimpses into the future. They are educated guesses that balance a variety of variables, including your client’s payment history, your own thoroughness in determining upcoming expenses, and the patience of your vendors.

Importance of cash flow management

Many organisations are under considerable financial stress and controlling cash flow is critical. In every business continuity strategy, funding and liquidity cash flow play a significant role.

Both methods for mitigating and budgeting more efficiently should be on the table when cash reserves are low. Not only does successful cash management keep your company in good standing with your creditors and out of debt, it also ensures that any residual profit can be reinvested in your company’s growth.

On the other hand, poor management or lack of cash flow can equate to missed financial opportunities and potential bankruptcy.

How has COVID-19 impacted the cash flow?

To eliminate the spread of COVID-19, government policy initiatives are contributing to major operational disruption for several companies. Staff quarantine, supply chain delays, inventory shortages, and abrupt consumer demand declines are causing serious problems for companies across a broader variety of industries than originally expected.

Collapsing demand and shutdowns in the supply chain are straining the cash and working capital of companies.

  • Suppliers unable to supply vital components, delay or interrupt the production process, resulting in the installation of WIP balances
  • A decline in market demand, resulting in higher inventories difficult to clear
  • Challenges in obtaining receivables from cash strapped clients within a timely fashion.

Common cash flow mistakes

Your business requires cash reserves, and sometimes the best strategies for handling cash flow are not always intuitive. Below are common business owners cash-flow management errors.

1. Lacking a cash flow management strategy

Effective cash flow management is the outcome of planning cash flow management techniques which analyse workflows of your receivable accounts and accounts payable to identify possible cash flow bottlenecks.

Regularly monitoring cash flow will illustrate the cyclical peaks and lows in your business. This data is likely to assist with inventory planning, borrowing scheduling, recruiting employees, and facilitating improved marketing and promotions activities.

2. Being passive with late payments

Cash flow can be impacted due to unpaid expenses. In all consumer contracts or service agreements, set out the payment terms, ensuring due dates are clearly listed on your invoices. Send automated alerts when an account passes the due date and consider using accounting or payroll software.

A fixed timetable of follow-up reminders and final notifications being enforced is another consideration. A debt recovery plan you can activate when a final warning is not adhered to can also be beneficial. Alternatively, if you do not want to manage debt collection in-house, consider engaging a debt collection agency.

3. Dodging your bank

Banks are likely to be your most important lender, and reluctant to receive late payments or defaults. Liaising with your bank regarding how on track you are to make payments is pertinent. Banks are more likely to make an extended payment if they see cash flow projections and an updated business plan.

4. Ignoring to set milestone payments

Large projects can be lucrative for your business however waiting for the completion of a big project can be a strain on your cash flow. Setting a sequence of milestone payments may be useful to ensure cash reserves are available during the project term.

Linking milestone payments to clear project deliverables aligning a payment management strategy whilst your client has a clear payment timeframe.

Immediate cash flow management tips

Cash flow in times like this is significant to overall business strategy and risk and a cash management plan mitigates this risk.

Highlighting lessons learned from the 2003 SARS epidemic, the 2008 recession and credit crisis and their impact on global supply chains, we propose the following procedures and strategies for consideration:

1. To shorten the cash conversion time, use technology

You can speed up billing and collection by sending invoices electronically rather than by mail. Providing vendors electronic access to invoices and electronic payments reduces the time it takes to settle disputes by introducing a vendor portal. These solutions also tend to provide timely and comprehensive documentation for organisations that may assist take effective action to address late payments or take advantage of discounts from suppliers.

2. Where possible, convert fixed to variable costs

In times of volatility, it is usually a smart idea to substitute fixed costs for variable costs whenever you can – to maintain your core business while increasing the versatility on the fringes. Selling properties, then leasing them back, is one way to collect emergency cash. You may also want to consider extending the use of activities such as contract manufacturing, fleet leasing, and third-party warehousing. This is not likely to be a quick-hit measure for most businesses, however, could be critical for long-term cash flow management, depending on how long demand and supply chains are disrupted by COVID-19.

3. Matching financing with your cash flow commitments

All businesses have both short-and long-term cash-flow responsibilities. Short-term provisions include day-to-day operating expenses. Longer-term commitments usually apply to capital investment in infrastructure and term debt maturities. To be competent in cash flow management, businesses must adapt their different sources of financing to their capital flows. This will ensure that an otherwise profitable company has access to the cash it requires to fulfil its continuing obligations.

4. Anything you can learn yourself, you can learn faster when guided

You don’t need to do this on your own! Identifying an independent external adviser to review the position of your business, fill skill gaps in your knowledge and make recommendations is vital to enable highly effective, timely strategic decisions without breaking the bank.

Challenging your thinking and assumptions, as well as offering unbiased, objective and unique perspectives and innovative business insights from a support network of like-minded company owners have never been more critical in today’s business world.

 

Coraggio highlights four key areas towards achieving business objectives:

Conclusion

For your business, cash flow is like oxygen. Supporting the flow will increase your breathing space, which is why it is necessary not to leave the management of cash flow to chance.

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