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Cash Management

Be the King of Cash

Whether your business is large or small, commercial or not for profit, selling goods or services, cash is the lifeblood that needs to flow through it. This requires focus – since Cash is King, you need to be the King of Cash.

“Making more money will not solve your problems if cash flow management is your problem”

Cash Management is all about making sure the lifeblood flows through your business. You need to focus on making sure it:

  1. Is regularly monitored
  2. Flows in consistently and predictably
  3. Is used effectively and efficiently within the business
  4. Flows out regularly in line with deadlines

1. Monitor cashflow regularly

Plan your cashflow. Just as you set targets for sales and expenses, you need to convert these to cash inflows and outflows. These days there are many tools to help you do this. I recommend cloud forecasting solutions such as Calxa (an Australian product) or Futrli. They can be integrated with your cloud accounting software (eg Xero, Quickbooks etc) within minutes. Their online training will help you convert your revenue and expense forecasts, or a good accountant/adviser will be able to assist or do this for you.

Check your performance regularly. Things always change so make sure you know how those changes will impact your cash forecast. Understand what is driving those changes, for example:

  • If sales are down, is is temporary? Are they delayed or gone forever?
  • Are some of your customers suddenly paying later?
  • Do you have unexpected expenses?

Proactive financing. Arrange financing to cover times of temporary cash shortage or low cash balances. For example:

  • Invoice Financing;
  • Working Capital Financing;
  • Equipment Financing;
  • Long-term Loan;
  • Overdraft or others.

Take action. Even with financing in place you’ll need to keep on top of your cash movements. The next sections detail actions you can take.

2. Ensure cash inflows are predictable and consistent

This is all about getting your customers to pay when you need them to. Some tasks may be difficult however are necessary to make sure enough cash comes in to support your business.

Set short payment terms and review regularly. Don’t just default to 30 day terms – default to CBD, 7 or 14 days wherever possible. If you notice customers are consistently paying late then discuss this with them asap. You can also nudge them towards paying earlier using techniques such as:

  • Late payment penalties;
  • Early payment discounts;
  • Temporary reduction in payment terms (eg Cash in Advance for 2 months);
  • Direct Debit technology such as Go Cardless and Pinch Payments (both Australian products) are extremely easy to integrate with cloud accounting systems. Your customers save time in paying you and you get certainty of payment.
  • Consider debtor insurance as consistently paying late can be a sign that your customer is in trouble. In the worst case they go into administration or liquidation, and you have a large hole in your cashflow. If your total AR balance is concentrated in only a few customers, there is a large risk to your business continuity if one of them can’t pay you.

Chase your debts regularly. Consistent, regular contact with customers increases the likelihood they will pay on time. Technology is also your friend here, with a number of apps that integrate with cloud accounting system to automate reminder sending, such as Chaser, EzyCollect (Australian product), and Debtor Daddy. Features can include automation for:

  • Email reminders;
  • SMS reminders;
  • Voice reminders;
  • Escalations within your business;
  • Escalations within your customer’s business;
  • AR specialists to call your customer;
  • Debt collection or legal processes.

Think about what type of reminders will work best for your customers and see the results.

3. Use your cash efficiently and effectively within your business

The hard work in choosing which business activities to spend cash on to deliver and manage your goods/services should happen when you prepare your forecast or budget. Don’t take the easy way out and just copy last year’s costs to this year. Assess them in line with your revenue expectations.

Take time to understand how your expenses drive / support your revenue. All parts of your business contribute to your top line and/or your bottom line. You can adjust the way your business works by changing your spend but remember that they work together. For example if you increase marketing spend to increase revenue there will be a point at which you need to increase spend in other areas to keep up. Likewise you need to understand the impact of reducing expenses in specific areas on the rest of the business.

Measure what counts! Once you understand how your expenses drive / support your revenue, measure performance in those areas so you know they are effective. What you measure drives performance, so make sure to focus on only 1 or 2 things. Measure outcomes instead of workload. Your measures will be specific to your business, but some examples include:

  • Number of new customers
  • Lead conversion rate
  • On Time In Full (OTIF) delivery %
  • Customer Satisfaction score
  • Staff Satisfaction score
  • Days Sales Outstanding (DSO)

4. Ensure payments are made regularly

Good regular payment behaviour sometimes gets forgotten (especially when times are tough). It is however an essential part of good cash management.

Spread payments out to minimise large cash outflows. Smaller payments more frequently are easier to manage in line with your cash inflows, especially if your inflows are regular and predictable.

Don’t delay paying your suppliers without talking to them first. You rely on your suppliers – you have a relationship with them. Paying them later than agreed may not have an immediate impact, but we all remember our customers that consistently paid late. Some businesses rely on government guidelines for small claims or statutory demand thresholds to delay or even avoid paying suppliers. This will always catch up with them as their suppliers will eventually stop supplying them altogether.

Never delay paying statutory obligations without making a payment arrangement. Sometimes your business might have a temporary cash issue and can’t make statutory payments such as PAYG, Income Tax, Superannuation, Payroll Tax etc. If this is the case, contact the relevant authority and request a payment plan or extension. Penalties can apply for late payments and directors are personally liable for non-payment of some obligations.

Be the King of Cash

Now that you understand these four principles of cash management, become the King of Cash by implementing them in your business. A good accountant/adviser can work with you to make this happen.

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