SIX ESSENTIALS FOR CASH FLOW MANAGEMENT
Written on the 17 October 2016 by Des Caufield
MONITORING cash flow should be your number one priority if you are a business owner; after all, cash is king. Part of this process is having careful control of debtors, for anyone that has experienced times of tight monetary control you know how critical this is in tough times.
1. Obtaining interest free credit
The cheapest form of finance is often supplied by your suppliers and creditors. Generally you can get 30 to 60 days credit interest free. Of course, the reverse is true when you are the supplier and therefore giving interest free money to your customers.
2. Be prepared for rising interest rates
Interest rates are currently at historical lows and whilst they look set to say there for the near future, rises are inevitable so you need to be prepared. In the current low interest rate climate you should ensure that you have appropriate policies and practices in place that will ensure that you can survive the eventual interest rate rises.
3. Monitor debtors payment patterns
Insolvency practitioners list major bad debts as one of the main causes of business failures. Your focus should always be on your cash flow no matter how well the business is doing with particular attention being paid to your debtors.
4. Watch out for customers
It's not just debtors that you have to monitor - a trusted customer who has always paid within your normal trading terms could miss a payment date and ask for an extension. You could be tempted to give some leeway but in tight financial times this is the wrong thing to do. Instead, contact your customer immediately to determine the reason and don't be afraid to demand payment. If the slowing of payments continues you should seriously consider whether it is prudent to continue trading with this customer.
5. Take stock
Despite the lower interest rates on offer at the moment you should resist the temptation to 'stock up'. Too much stock places strain on cash resources - you need to have enough stock to supply customers but resist holding quantities that may take months to sell (just look at Dick Smith).
6. Is it time to fix it?
Now could be a good time to consider fixing interest rates but be aware that if you are planning to exit a fixed rate facility, it often comes with penalties. It may sound like common sense but if you're planning on selling your business in three years do not fix rates for five years.
Author: Des Caufield
About: Des Caulfield is Director at MGI Adelaide. With more than 40 years experience in the accounting profession, he has extensive knowledge and understanding of the issues faced by businesses across a diverse array of industries and sectors. He has a particular interest in the family and privately owned business sector, consulting to a wide range of clients on issues such as taxation and estate planning, succession planning, business sales and acquisitions.