Working together to improve cash flow

For any small business, improving cash flow means speeding up the processes involved in creating, sourcing, stocking and selling a product , as well as the collection of payment from debtors.

With all these elements having a part to play, cash flow is not just a concern for the finance department; it’s everyone’s responsibility within the business.

Embedding a cash culture throughout a business will help you improve your cash position.

Just as staff can be incentivised to improve the operating performance of the business, they can also be incentivised to improve cash flow. If cash is the key obstacle or challenge for a business and there is budget for staff incentives, the incentives should prioritise improving cash flow for employees whose actions can influence it.

Top tip: It’s crucial that staff do not address cash to the detriment of other areas of the business (such as sales or the cost of materials) and therefore profitability.

Improving cash flow typically means negotiating credit from suppliers (to the maximum extent it is available without damaging relationships), and ensuring customers pay on time. For many, it also means manufacturing stock as quickly and efficiently as possible to support sales, while also minimising write-offs or quality control issues.

The management team needs to ensure that people throughout the organisation understand that cash is key and that they should look for areas of improvement. This will mean that people in different departments will need to take different actions.

Stock and inventory management: Any member of the team involved in controlling manufacturing and stock should be in a position to look for improvements in cash tied up in inventory.

Managing creditors and debtors: Finance and credit control will be keen to improve the amount tied up in debtors. However, the sales team can also help, for example, through prompt invoicing and spotting early warning signs of customer financial problems. The procurement team can also be incentivised to improve the terms that are agreed with suppliers.

Strategic decision-making: Higher-level decisions, such as the timing of key purchases (provided delay does not have a negative effect on performance, or jeopardise any key customers), directly impacts working capital. It’s vital that this is discussed at board level, particularly in challenging times.

Financing change: The other decision is around the use of facilities, such as asset-based lending (ABL), supply chain finance, overdrafts or drawing down on loans.

Find out more about finance options for improving working capital.

Review incentives: If incentives have been created for staff to improve operating performance, you can put regular reviews in place to establish whether the incentives are having the desired effect. Is the focus on continuous improvement? Are cash flow performance targets set at an achievable and realistic level?

Good customers make prompt payments. To speed up payment of accounts receivable, certain actions can be taken:

1. Issue invoices promptly and follow up late payments immediately.
2. Identify slow-paying customers and, if necessary, introduce cash on-delivery rather than cancelling business with slow payers.
3. Offer discounts to customers for prompt payment.
4. Request deposits when orders are taken.
5. Ensure credit checks are taken on all new credit customers.
6. Sell old, obsolete stock for the best price you can, as soon as you can.

Sharing responsibility for cash will take pressure off the business and support your accounts team. Use the checklist below, and consider who in the business can help most with each of the relevant opportunities to release much-needed cash.

Customers

• Are major customers paying on time?
• Is your product or service mission critical to your customers, so that payment of your invoices can be made a priority to them?
• Are any customers having financial difficulties that might result in delays to payment?
• Do you have good credit management practice? Has a procedure for contacting customers for payment been established – ahead of payment date for historically problematic customers, and immediately after a debt falls due for customers that usually pay to terms?

Stock/inventory

• Are any stock levels of particular products rising because of slowing sales?
• Do you have sufficient stock levels to meet customer demand, or excessive stock levels?
• Do you have too much working capital tied up in work-in-progress? Are products in manufacturing for orders received, or speculative sales?

Suppliers

• Are you taking full payment terms with suppliers, but ensuring you pay on the due date?
• Should you talk to specific suppliers about extending their credit terms?