‘Cash is king’ for SME’s and all companies need to employ best practice cash management policies. Based on my extensive experience as a part time Finance Director, I offer the following key practical tips:
Cash planning
Ensure that a cash flow forecast is updated regularly (daily/monthly/weekly) – it can be a simple excel spreadsheet for next 30-90 days
Ensure as accurate as possible, with checks in place to track actual vs. forecast performance
Establish KPI’s such as days sales outstanding to monitor progress
Accounts receivable
Ensure that invoices are sent out as soon as possible and offer early payment discounts if appropriate. E-invoicing offers potential process improvement
Agree up-front or advance payments where possible
Ensure that credit checks are done on new clients to minimise risk
Obtain electronic payment via BACS or set up direct debits (and avoid payment by cheque)
Get support of salesmen with customer relationships to work alongside your credit controller and follow up regularly via phone or email to chase unpaid amounts
Know your customer’s payment cycle and ensure you are on the payment run; clear any queries in advance
Consider options of discounting invoices individually or as a whole and factoring to bring in cash earlier
Accounts payable
Ensure good working relationships with suppliers
Where possible, agree longer payment terms up-front
Keep suppliers informed if you are struggling to make payments and work with them on extended terms
Inventory
Look to convert into cash as soon as possible through active cash management
Monitor and track inventory levels closely and ensure that they are not too high
Look to offer discounts on slow moving inventory to convert into cash
Banks and credit
Ensure a good relationship with your bank manager
Look to have some form of overdraft to tide you over monthly fluctuations in cash flow
Aim to minimise overdraft levels where possible to keep costs down
Cost control
All business should monitor their costs closely and this will help ensure cash is managed tightly
Conclusion
These steps are seen as simple and straightforward best practices which are in place at well run SME’s. However how many companies can tick the box in saying they follow these practices? The finance team can help with ensuring the processes are followed, but the ‘cash is king’ principle needs to be considered by the whole business team.
This blog has been written by Ian Simpkin, Client Finance Director with Tectona.
To find out more about about risk management or if you would like to discuss any of the topics covered above further with Tectona Partnership, please contact Mark Nicholls on 07818 407061.