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Cashflow management 2012


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Some thoughts re managing your cash resources better

Published in: Business
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Cashflow management 2012

  2. 2. CASHFLOW MANAGEMENT CONTENTS OF WORKSHOP• Introduction• Outcomes of workshop• The cash cycle• Timing• Budgeting• Financing & types of credit• Processes & policies• Managing Debtors• Managing Creditors• Reporting• Cashflow warning signs• Improvement strategies
  3. 3. CASHFLOW MANAGEMENT INTRODUCTIONThe term “cash is the lifeblood of any business” is a saying that will never change. For whateverwe sell or how good our products and services are if people don’t pay for them and in a timelyfashion you will go broke.Conversely it’s just not good enough to know when money is coming in we also need to knowwhen money needs to go out.With business changing constantly you need to have the knowledge and take active control ofyour cashflow cycle if you wish to remain in business.
  4. 4. CASHFLOW MANAGEMENT OUTCOMES OF WORKSHOPThe outcomes from this workshop are to help provide your organisation with the necessaryunderstanding to be proactive in monitoring the cashflows and forecasting within your businessthat will make sense, can be viewed and acted upon when necessary and provide the stablefoundation from which to grow.Some of the key factors to be explored include• Debtors & creditors• How to determine if cashflow is positive• Warning signs• How to forecast into the future
  5. 5. CASHFLOW MANAGEMENT THE CASH CYCLEEvery organisation that is in business has a cash flow cycle. A cash flow cycle is what it takesfrom the original purchase of raw goods or services to go through the system and receive cashfrom your customer.A simple diagram on the next page shows a typical cash cycle.The best way to help organisations to take greater control of their cashflow is to firstly map outthe stages to analyse if there is a better way of getting cash in faster and a better way to makethe system more efficient.
  7. 7. CASHFLOW MANAGEMENT TIMINGThe term timing is everything rings very true with regard to managing business cashflows. Acritical part of this is knowing when money is coming in and when creditors need to be paid.some useful points of reference to think about.• Progress income payments from client• Normal monthly payments rent, wages, office expenses, phones• Up front payments from clients• Credit terms bought back to new level• Power of customers to withhold payments• Types of suppliers
  8. 8. CASHFLOW MANAGEMENT BUDGETINGCash flow budgeting is one of the most important aspects of your businesses long term success.If this aspect is not managed properly you will generally run out of cash. If this happens you cango broke very quickly. You have a much better chance of survival if you can forecast your cashneeds in advance.A typical budget forecasts the incomes and outgoings on a monthly basis. This can even bebroken down further and monitor the receipts and payments on a weekly or daily basis.The main purpose of this is to calculate if you will have enough money coming in compared towhat is going out. This enables you to predict whether you will be able to grow and addresources as well as times when extra cash will be needed to support the business.So how do I do this ?
  9. 9. CASHFLOW MANAGEMENT BUDGETINGThe easiest way to do this is to break it down into smaller bits.Step 1 Prepare a sales forecast.This is generally the hardest part because there is uncertainty in what sales are to be made. Agood way of doing this is to look at last years sales and use this as a guide with understanding ofpotential outside factors that could influence the figures.Step 2 Project your inflowsUtilise receivables reports for information as well as your payment terms.Step 3 Project your outflowsUtilise payables reports for information as well as your creditors terms.Step 4 Put it togetherSee how it looks and manipulate as warranted. Look for impending gaps in income / expenses
  10. 10. CASHFLOW MANAGEMENT BUDGETINGWhen undertaking the preparation of cashflow budgets there are some important factors toconsider, that may not give you the best information to make decisions with.• Do not overestimate your sales forecasts• Being overly optimistic in your general assumptions• Spending to much time analysing figures constantly and missing the big picture• Ignoring history of creditors and debtors• Underestimating costs across the whole organisation
  11. 11. CASHFLOW MANAGEMENT FINANCING AND OTHER FORMS OF CREDITWith every business during their lives whether it be in the startup stages or for more matureorganisations their may be the need to access finance at some stage to grow, smooth out cashFlow ups and downs, move into new markets or commercialise new ideas.As business is constantly changing we need to adapt our situations sometimes very quickly. Thismay require a particular type of funding short or long term and an opportunity may be missed ifwe are not able to capitalise quickly and efficiently.Being able to know what people look for in accessing your funding applications and knowing ifWe really know what amount of funding we require and how it will be best utilised in helping ourorganisation to grow.
  12. 12. CASHFLOW MANAGEMENT FINANCING AND OTHER FORMS OF CREDITWhen looking at accessing some extra funding some questions need to be asked :• Why do I need the funding ?• What type do I need ?• Types of funding avenues ?In being able to access these areas dependent on what your needs are, there are a few commonareas that also will need to be understood before approaching anyone for finance.• When is it needed ?• How much is needed ?• Whether it is profitable / sensible to access funding
  13. 13. CASHFLOW MANAGEMENT PROCESSES AND POLICIESEvery organisation has their own processes of controlling their cash.Here are some common questions to ask• What are the credit terms ?• Are their any terms and conditions with projects ?• Do people pay by cheque or direct debit ?• Are there certain debtors with their own payment terms ?• Are there creditors who require applications to provide credit to you ?• Is your Petty Cash reconciled and kept safe ?• Do you have a banking procedure ?• How long do you keep money on the premises before banking ?• Who has control over the cash in your business ?• Are 2 cheque signatories required ?
  14. 14. CASHFLOW MANAGEMENT MANAGING DEBTORSBeing able to manage your debtors correctly is a key strategy to help you control your cashflow.If you are not able to do this well you may experience an incidence of bad payers and bad debts.Some practical hints include :• Proper invoicing practices (clear and quick )• Penalties for overdue accounts• Customer checks• Give other payment options eg credit cards or continual payments• Give credit limits to certain customers• Do more business with your larger / better payers• Don’t feel guilty about asking for money it’s not personal• Keep on top of outstanding customers payments
  15. 15. CASHFLOW MANAGEMENT MANAGING CREDITORSAs well as getting money in quickly we need to be prudent in how much goes out. We need tomanage this to ensure a good cash position.Some practical hints include :• Knowing the amount and type of stock you are holding• Knowing the cost of stock you hold• Do your suppliers accept returns ?• Are purchases geared towards busy periods ?• Knowing where your costs are• Being able to pick discrepancies in costs soon after the event• Create good relationships with your suppliers• Are purchases done by 1 person and do they shop around for better prices ?
  16. 16. CASHFLOW MANAGEMENT REPORTINGWith all the cashflow management information that is needed today to efficiently monitor andmove on potential problems it stands to reason that there needs to be some way of analysing theinformation.A reporting system that gives you all the information quickly that you can understand, highlightareas that need attention is what is needed to gain a complete picture of the current situation.This is also relevant with budgets and the longer term cashflow objectives of the organisation.Many of these reports can be created from the accounting system or worked out on aspreadsheet or even a mixture of the above. The important thing is that you have reports that tellyou the information that you need. Every business is different but these types of reports will onlychange in size and complexity but still have basically the same information.It also might be advantageous depending on how complex the information you require is tocreate some simple KPI’s in conjunction with the reports
  17. 17. CASHFLOW MANAGEMENT CASHFLOW WARNING SIGNSWith all the fluctuations in business it is at times difficult to ascertain whether the merry go roundOf ups and downs is just a normal pattern and will change again as it always does or are thesigns that the cashflow might be in trouble.Some early warning signs might be :• Going over your bank overdraft / credit facility• Part paying suppliers• Having to pay suppliers in cash ( not having a credit facility)• Having trouble paying creditors and wages• Having trouble meeting compliance payments (tax, super)• Concentrating on cash management not running the business• Not meeting projected forecasts repeatedly for no external reason• Having to continually put of growth decisions (capital purchases, new staff)
  18. 18. CASHFLOW MANAGEMENT IMPROVEMENT STRATEGIESOn top of all the things we need to remember to manage our cashflow here are some otheruseful and practical ways to help improve your cash management.• Invoice as soon as practical to do so• Make sure payment terms are at the limit they need to be• Increase prices to people that pay slow• Create better systems to pay suppliers• Update budgets regularly• Increase cash sales• Look at all costs for better savings• Put off large purchases until you can budget & pay for them• Make sure regular analysis is done• Think of leasing assets rather than buying
  19. 19. CASHFLOW MANAGEMENT IMPROVEMENT STRATEGIES• Get progress and or start up payments from customers• See if assets can be more productive• Sell of surplus assets• Be better at collecting money• Pay quicker if offered incentives• Get extended credit from your suppliers• Keep stock levels as lean as possible• Control your spending habits• Delay hiring new staff maximise productivity of what you have• Staff knowing their job well and understand cash cycle