Sharpening the “cash flow tool”

Sensitivity analysis

This testing reveals the responsiveness of profitability and cash flow to changes in some of the spreadsheet variables. For example, what happens when:

• There is an unforseen 10 percent change in procurement costs.

• There is a drop of five percent in productivity.

• Sales volume drops by say 10 percent.

• A sales person unexpectedly resigns and there is a delay in replacing them, and training them until they get to full effectiveness.

• There is a variation in interest rates.

From these scenarios you are then able to put appropriate actions into place to ensure you have sufficient life blood to enable your business to grow as you have planned.

Making it happen

You know, really managing cash flow, I think, is just one of those things that requires a little bit of focus in each aspect of the tool. Those aspects are –

• Making operational profits.

• Controlling growth and funding it.

• Effectively managing capital expenditure.

• Managing stock levels.

• Managing receivables.

• Managing payables.

• Controlling borrowings and interest costs.

• Making the most of “idle” cash.

• Optimising your tax situation.

Let’s look at a couple of the more important of these.

Managing receivables

This one is a biggy and we are going to see a lot more emphasis on this in the near future as things get more difficult.

Companies are going to try to hang onto their cash for longer. When they do that your methods of getting what is owed to you will need to be very good. Some of the things that you will need to do will be –

• Invoicing on time and correctly.

• Following up to make sure they have received the invoice.

• Talking to the client to make sure you are on the payment list.

• Getting a commitment as to when they will pay.

• At the first sign of non-payment having a meeting with the client to resolve the issue. If they are not paying there is always a problem somewhere.Remember – any receivable more than 90 days outstanding is almost unrecoverable

The regular review of the statistic “day’s sales outstanding – DSO” will help you to keep a check on how you are doing in this aspect of cash flow management.

Managing payables

In the same way your customers may be holding back on paying you, you may elect to delay payment to your creditors so you can have enough cash to run the business.

You need to be very careful in how much you do this as you still need their services and products in order for your business to survive and grow.

However, if you are going to really manage this area well, you will need to:

• Communicate with your vendors and distributors so they don’t put you on credit hold.

• Pay all the small ones and then you need only to focus on the big ones.

• Take advantage of early payment offers if you have the cash to do so.

• Prioritise your payments – focusing on these things will ensure your payables are under control and giving you any advantage that is available.

• Managing stock – basically, get rid of it, fast.

• Controlling borrowings and interest – continue to look at the funding of your business to see how you can get a better deal. There is always a better deal.

• Idle cash – make sure it is invested well. Eg., on overnight money markets so you get a good return and you can always get it back when you want it.

Well, this “cash flow” tool is one heck of a tool, with many aspects to it.

It sounds like a simple one, but as we have seen here, it is quite a complex one and to keep it sharp takes a lot of continual work, constant “what if scenarios”, and constant evaluation of stock, receivables and payables.
I hear you say you do not have the time.

I say to you that this is your business life that we are talking about. Get into it and make sure you are the one to be able to say …”we are on top of our cash situation at all times”.

Remember cash is the lifeblood of the business. You have got to keep an eye on it at all times.

If you would like to have some help sharpening your cash flow, contact Barry at barry.freeman@quantify.com.au.
For more information on Quantify Corporation go to www.quantify.com.au.

cash finance flow sharpening the tool