Business Cash Flow and Your Working Capital

The maintenance of positive cash flow and the management of the cash collection function are fundamental to the success of any company. especially during the Covid-19 crisis. This article discusses how to achieve the improvement of company cash flow and your working capital goals.


Strategic Focus of the Company

Companies should concentrate more on what they refer to as 'A' Class clients. This strategy alone should result in improved cash flows and working capital for the company for the following reasons:


• Larger clients should be more creditworthy

• Payments from larger companies tend to be easier to predict due to their higher reliance on systemised payments (as opposed to ad hoc payment from small businesses)

• Larger clients and higher fees will result with less work being required to collect the same amount of cash

• Fewer and larger clients will enable better credit control


For the above reasons, I believe that the move to concentrate on 'A' class clients will benefit your company’s cash flow.


When working with clients I find incorporating business planning and business modelling to be the most effective way to set the strategic focus of the company. As we assess target markets, target customer types, how to reduce competitive forces, viability of increasing prices, revenue, and profits, as well as how to manage long term cash flow. If you have not recently completed a planning and business model review you need to talk with me about the benefits and next steps.



Management Philosophy

Management's attitude and philosophy set the tone for the views adopted by your employees. If the owners or upper management are lax in their habits, this will permeate the culture of the company. Cash is the life-blood of any company; without it, there is no company! Cash flows can be monitored and improved as part of the comprehensive financial reporting (something I can talk with you about).


I recommend that the following procedures and targets be implemented to improve the management of cash flow:


Use ratio analysis as a means of quickly grasping the situation with regards to outstanding cash. Debtors' days should be calculated every month (and in today s environment perhaps every week) and compared to a budgeted figure and actions agreed. This calculation and regularity ensure catching the potential problem with debtors. Also:

• Manage cash tightly, and cash flow reported against budget each month

• Make weekly cash collection projections

• Make a member of staff responsible for managing and reporting on cash flow

• Tightly manage expenditure and spending in line with budgets

• Make a company policy whereby the company takes advantage of all available credit terms and do not make early payments unless you receive a discount


As a management philosophy, cash management should form part of a well-run efficient company.


Critical Creditors

Treat your tax department and other government bodies as critical creditors as they can impose a fine on your company, and in some cases close down your company. Late payments can trigger costly (working hours and financial penalties), plus investigations. Factor taxation and other fees to government bodies into your cash flow as they are predictable. In most cases, I recommend the following:


• All critical government payment dates to be noted by more than one officer of the company

• Separately itemise in your cash flow payments to the government

• If necessary, payments to other creditors should be deferred to ensure payments to government creditors


Companies are usually prepared to be more forgiving of late payment than governments, so use your relationship with suppliers to postpone payment if this is necessary. If you find yourself in this position, you need to assess the viability of your company and if it is trading insolvently. If this later situation is the cash, then talk with me to work on possible remedies. I have a number of services which improve the financial health of a company.


Pay When Paid (For Companies that Contract)

Seriously and carefully considered any attempt to introduce a policy of only paying suppliers after the company has been paid. If the company secures clients, any attempt at introducing 'pay when paid' may be perceived by the contractors as a strategy to reduce risk by the company. Contractors may demand a premium for accepting this additional risk and payment of interest on late payments!


This type of system may be considered as unfair as it is the company who decides to give the clients credit and not the contractors. It's my recommendation that the company does not implement a 'Pay When Paid system' for the following reasons:


• The company finds and accepts the clients and should accept the risk of its decisions

• 'Pay When Paid' may be perceived by contractors as being unfair and may result in reduced staff relations or increased cost of contractors to compensate them for the risk

• The company should rely on the professionalism of its contractors to ensure that work is completed on time and to a high standard

• Pay When Paid may also lead to disputes with contractors. When are contractors to be paid? If the company receives the money on the fifth of the month, when does the contractor get paid? Will this result in an increased number of payment runs?

• Who will administer the 'pay when paid' system and how much will this cost?

• What are the legal implications of this system? Does the contractor work for the company or the client? Who could be sued in the event of non-payment?


Professional management of the company's cash flow will mean that there is little to be gained in implementing 'pay when paid' policies.


Repayment of Shareholder Loans

Decisions on the repayment of shareholder loans is a strategic decision akin to dividend policy. Shareholders should never endanger the viability of the company, and therefore make any payments in pursuit of the company's long-term objectives.


Methods of Improvement

If you are interested in setting a stronger and more prosperous future for you and your company, then talk with me about the many ways I can work with you to grow revenue, improve cash flow health, increase profits and business value.


If you would like to discuss your cash flow, business planning and growth needs please contact me here. ProfitPlus are experts in business planning and business growth. We offer unique services that combine creating a business plan coupled with business coaching programmes such as our 90-day PlanningCLUB’s - ideal for Covid-19 times, find the profit and maximise your cash flow programmes. We provide interactive planning and business tools to help you through your business planning process simply and effectively. Our two-day (online) planning workshops result in outstanding 1 or 5-year business plans, created in just one or two days, to help you develop and plan your business for success, giving you higher profits (and more salary), more time away from the business, greater cash flow and increased value.



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