Category Cash Flow

We have covered the importance of cashflow and the differences between revenue and cashflow.

Also we noted what we needed to do in preparing a cashflow forecast.

Now we want to cover the most important part on managing cashflow effectively.

In managing cashflow, we want to make sure we have surplus cash available all the times.

Ways of ensuring effective cashflow management.

1. Monitor the cashflow forecast closely.
2. Ensuring billings are done promptly.
3. Fully utilize the credit term given by the suppliers.
4. Take advantage of the government incentive schemes.
5. Keep minimum inventory.
6. Implement effective debt recovery and collection.
7. Review expenses regularly.
8. Maintain a good financing line of credits.
9. Cash in on the discounts offered by suppliers.
10. Demand for deposit for big sales contract.

 

1. Monitor the cashflow forecast closely.

When we have the cashflow forecast, we usually notice the following scenarios:

• We forecast a positive cashflow.
• control of payments over a period of time.

So, in reviewing the cashflow, be it a weekly cashflow or a monthly cashflow, we will compare the actual and the forecast.

Since we always forecast a positive cashflow, we will not have to worry if the following work out:

a. the actual inflow of weekly cash in more than that forecasted. (assuming we are doing weekly cashflow).

b. the actual outflow of weekly cash is less than that forecasted.

if the above two scenarios play out, we are very sure that we will have cashflow surplus.

Reason being since we already forecasted a positive cashflow in which the cash inflow is more than the outflow of cash, therefore if the actual inflow is more than forecasted, and the actual outflow is less than forecast, we will have super positive cashflow.

On the contrary, if the actual inflow is less than forecasted and the actual outflow is more than forecast, then we need to review and find out the reasons.

Hence, by monitoring the cashflow closely ,we are able to take remedial action promptly, and rectify any weaknesses in operation immediately.

2. Ensuring billings are done promptly.

No billing means no payment by buyers, and no payments by buyers, we will run into cashflow issue sooner or later.

To ensure the inflow is not disrupted, we have to ensure our billings for work and services done are sent out immediately the moment work or service is done.

3.Fully utilize the credit term given by the suppliers.

a good business will take full advantages the credit terms given by the suppliers.

This is basic good cashflow management,

The main idea is – don’t pay the suppliers promptly and make sure debtors pay you quickly, that way you will not have any cashflow problem.

Sadly a lot of times, we see the opposite happen.

Bosses in their efforts to get in good term with suppliers, will instruct to pay the suppliers promptly, usually even before the end of the credit period.

And some bosses did not even bother to chase the customers to pay up fast, worry by doing so, will offend the customers, and this makes the finance staffs’ job more difficult.

4. Take advantages of government incentive scheme.

A good management will always take advantages of the government incentive schemes available.

Government such as Singapore government always has some good incentive schemes to support the businesses, especially the small medium enterprises.

So, to have a more effective cashflow, it is quite useful to take advantages of the schemes.

5.  Keep minimum inventory.

This may be arguable for some people, for me I am not one who favor keep a lot of stocks.

Having less stock mean the holding cost will be lower, and less space required to keep all the stock items.

This in a way , will not hold up the cashflow.

However there may be a different school of thought especially after the post COVID-19 situation, that depend on what industry you are in.

For manufacturing outfit, keeping raw materials at certain level may be a good idea but excessive inventory? I doubt that is the way to manage the cashflow.

 

6. Implement effective debt recovery and collection.

Debt collection and recovery are very important for a business’ cashflow.

If a company has a lot of bad debts or long outstanding debts, this will affect the cashflow.

If the finance department is not able to ensure the debts outstanding is within the credit terms given, then it is about to review the debt collection system of the company.

7. Review expenses regularly.

Management should take time to review expenses regularly.

Especially when the weekly cashflow forecast vs actual analysis is done, any obvious signal of expenses deviation need to be investigated and assessed.

By reviewing the expenses, if the management can do away with some of the unnecessary expenses, it will go a long way in helping to improve the cashflow of the company.

8. Maintain a good financing line of credits

Though the company may be in good healthy cashflow position, it does no harm in having a good financing line of credits standby in case of emergency.

With the readily available financing line of credits, it will not be a stress but it does not mean the company can simply go out and spend lavishly.

Having the line of credit readily available is just some sort of insurance for the operation.

9. Cash in on the discounts offered by suppliers.

Suppliers may offer some discounts for the business, and any company which operate on prudent cashflow management, will definitely take advantage of that.

To some extent, the discounts offered may offer the business some help in the cashflow position, all the more crucial during the challenging time like now.

10. Demand for deposit for big sales contract.

whenever a company has a big contract or order, it is good that it can get some deposit from the buyer, this will ease the cashflow of the business in fulfilling the orders.

it will be even better if the company can arrange installment payment from the buyers.

Conclusion.

Staying on top of the game in term of cashflow management is vital to the success of a business.

We should not let some missteps and miscalculation disrupt our cashflow management.

Take immediate action and rectify soonest possible, and you will not have to worry about cash crunch.

Always remember, take action, no matter how painful the action may be.

 

Today we continue our discussion on how to manage cashflow effectively.

Having realized the importance of cashflow in a business, which in my opinion, is more important than profit.

We can have a very huge profit, however if it is not reflected in the cashflow of the business, then it is high time we take a closer look at the operation.

How do we prepare a good and accurate cashflow forecast?

To manage an effective cashflow, we need to ensure we are able to prepare a good and accurate cashflow forecast.

There are a few points we need to take care of in preparing the cashflow forecast.

1. Identify the outflow and inflow of cash in the business.
2. establish the right line of communication for flow of information.
3. outlined the assumptions and factors used in preparing the forecast
4. Prepare, discuss and monitor the prepared cashflow forecast.
5. adjust and amend as the situations become clearer.

1. Identification of outflows and inflows of cash in the business.

We need to know what are the outflows and inflows of cash into the business.

For inflows, the obvious item is the revenue of the business, then in the course of business, we may secure some financing. both these two are the inflows of cash into the business.

Besides the above mentioned two, sometimes, shareholders may decide to increase the capital of the business, this will be another item as inflow.

As for outflow, we have to decide which are variable and which are fixed items.

For fixed item, it can be the rental paid for premises, and leasing of equipment which have fixed rental rate.

I like to categorize the outflow into operating, financial and capital in nature.

in terms of operating, we are talking about fixed overhead and variable overhead.

you can also classify into direct and indirect payment, just to make it clearer and easier to understand the natures of outflows.

Direct payments can be expenses such as utility expenses, salaries for the staffs.

2. Establish the right line of communication for flow of information.

In preparing the cashflow forecast, it is important that we have the right line of communication for flow of information.

If we want to have an accurate forecast on cashflow, it is important that the operation side know what information to furnish to finance staffs, so that they can use the right data to prepare the forecast.

Finance staff must also know who to look ask for information, the right data, same with other department like marketing and customer services.

3. outlined the assumptions and factors used in preparing the forecast

In preparing the forecast, we have to make sure we have the assumptions correctly spelt out, and the factors used.

Without showing the assumptions, readers and users will not know what are the basis and how the forecasts are prepared.

4. Prepare, discuss and monitor the prepared cashflow forecast.

a cashflow forecast prepared and just left it on the shelf will not serve any purpose.

the management staffs need to monitor and discuss the forecast every now and then, to see how much is the deviation of the actual from the forecast.

5. adjust and amend as and when the situation become clearer.

if the management of the business is able to monitor the forecast regularly.

they will be able to see the deviation of the actual from the forecast and if need be, make the necessary adjustment, so that the forecast is more reasonable and sensible.

We can also use the cashflow forecast as a tool to make business operation better and more efficient.

from the cashflow forecast and in the weekly review of the forecast, we can see whether we are not doing as good in our debt collections, if that is the case, then we can take the necessary action, may be to beef up the debt collections process, find out why the customers are not paying.

If we pay more than  as forecast, we have to find out the reason.

By doing so, we can improve our business process and operation efficiency.

Getting the real cash position to match the forecasted figures, require a high discipline from every one in the business, thus, the importance of timely review and analysis between the actual and forecast.

Most companies are not able to survive a short term cash flow shortage, if no forecast is available, business will not know where it goes wrong, not to mention to take the remedial actions.

Cash flow forecasting is tedious and arduous,  bear in mind, it is also a very important tool.

This critical process will let you know how much cash your business can generate, it can also enable you to know what you need to fund future expansion and working capital.

While your forecasts will never be 100% accurate, by preparing it frequently, you will develop an uncanny ability to make a more accurate forecast if you can devote the proper resources to cash flow forecasting sooner rather than later.

In my next article, I will talk more about how we can make use of this business tool more effectively.

If you want to learn more about cashflow, you may want to go HERE

Cash Flow, a term every business man is familiar with, it is also a term a lot of business man misunderstand.

So what is a cash flow?

Cash flow, to a finance guy, is the most important thing in a business.

However, if you go and tell the boss this, he will disagree, he will tell you sales is the most thing in a business.

if cash flow breaks down, definitely the business will break down.

People may argue without sales, you don’t have money coming into the business.

However people tend to forget when you start a business, you need capital, that is cash flow!!!!.

In a nutshell, cashflow is the amount of cash that is moving in and out of your business cycle at a certain period.

Positive and Negative Cashflows

If you have more cash flowing into your business than out of your business, then you have a positive cashflow.

That means you do not have to worry about meeting your payments requirement and settling your expenses especially the salaries of the employees.

On the other hand, if your cash flow position shows a negative cashflow, perhaps it may give you some worrying signs.

Negative cashflow may indicate your inability to meet your financial obligation, you may also have difficulty in paying for your expenses, worse still, you may not able to purchase goods to sell.

Thus, the importance of having enough money to meet all the business obligations is also knows as Working Capital.

What is the different between Sales and Cashflow?

Earlier I mentioned about sales and cashflow, and people think these two items are the same and one.

Actually the two terms are quite different, though these two terms go hand in hand and related closely.

Without sales, after the initial start up capital, there is no inflow of money to the business and this will create a big problem for the business to operate smoothly.

Hence, sales to certain extent is an indication how much money will be coming into the business.

What about Profit and Cashflow?

quite a few people like to think profit is equivalent to cashflow.

You can hear people ask a question – the company has so much profit, but why isn’t there money in the business at all?

Some are puzzled the business has so much profit but having difficulty to fulfil its financial obligation.

A good credit analyst will do the followings:

• look at the profit and loss account of a business,
• he will also look at the changes in the financial position of the business.

By looking at the changes in financial position of a business, it is easier

• to determine whether the business has healthy and
• positive cashflow, or whether
• the business is facing acute cashflow deficit despite being very profitable.

Therefore, the management must learn how to read the statement of changes in financial position.

Importance of understanding changes in financial position.

This is to enable them

• to grasp a better idea and take hold of the situation.
• By doing so, at least the management has a rough idea
• of what is the position of the liquidity of the business, and if need be,
• take some actions to strengthen the cashflow of the company.

Why does cashflow matters and important?

Just imagine, if you do not have the cash in hand, a lot of things in the business will come to a standstill.

You may not be able to pay the salary of your employees, this will badly affect the morale of the staffs.

When suppliers hear you have cashflow problem, the first thing they do is to cut the supply and this will affect the operation of the business.

Worse, if the suppliers decide to take drastic action to recover the amounts the business owed to them.

This will definitely

• damage the reputation of the business
• when suppliers file for action to wind up the business or
• put it under judicial management.

Managing cashflow and learning how to do it effectively, is a fundamental process.

A process which eventually will lead you to grow your business in a more profitable and sustainable way.

Once one has learnt and finally know the inside out of cashflow management, it is then the time to start looking at growth of the businesses.

Next I will be talking about How To Manage Cashflow Effectively in my next article.