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