With consumers tightening their belts, and the economy seeing sluggish growth this year, 2014 did not bode well for revenue gains in South African businesses. For many companies, 2015 will be another tight year. So how can you improve your cash flow system to ensure you are getting the maximum amount of money from your operations?
Matt Quinn, a contributor to Inc.com, outlines the basic premise to follow. “It’s a simple enough formula,” he says. “Collect your receivables as fast as possible and slow down your payables without jeopardising your relationship with suppliers.”
Nevertheless, some companies do it a lot better than others. So much so, that having a well-performing cash flow system can be viewed as one measurable of success. According to research conducted by working capital consulting group REL, top performing companies collect from creditors 17 days quicker than other companies, and take 10 days longer to pay suppliers. So how do you ensure your company is among those taking advantage of a well-streamed cash flow system?
- Make regular, short-term cash flow projections. Your cash flow projections shouldn’t only be looking into the distant future. They should be looking at next month, or even next week if necessary. The more tenuous your cash flow is, the more often and closer to present your projections should be. This forces you to face reality – however painful that might be – and plan for the pull on your resources.
- Know amounts and dates of upcoming cash requirements. This means you need up to date, hands-on knowledge of how much is spent on regular expenses, and when. Have a separate line item on your projection for every significant cash outlay in your cash flow system. The more detailed, the better. For example, separate out salaries and wages from professional fees paid and directors’ emoluments.
- Manage your receivables. Improve your cash flow system by speeding up the time it takes to turn over your receivables. As the Entrepreneur puts it: “The basic idea is to improve the speed with which you turn materials and supplies into products, inventory into receivables, and receivables into cash.” The publication outlines a few ways to get this done, including:
- Offer incentives by way of discounts to customers who pay their bills promptly
- Ask for deposit payments when orders are taken
- Flush out old, outdated inventory – sell it for whatever you can get for it!
- Issue invoices promptly and follow up swiftly if payments start to lag
- Constantly guard against expenses overtaking sales. Monitor your cash flow system to ensure that expenses never outstrip turnover. When sales are flush, business owners sometimes mistakenly take their eye off their cash flow, on the assumption that sales will easily cover the money leaving the business. It’s times like this that expenses can creep up and expand unexpectedly.
- Work out ways to maximize on your payment terms. The Entrepreneur suggests paying your creditors on the last day of your payment terms. In addition to this, pay using EFT to hold onto your funds for as long as possible. Maintain good relations with creditors, and ensure your procurement department communicates proactively with those with whom you regularly do business. If you have lag on a payment, make sure they know to expect it, and why.
Follow these tips to revitalize your cash flow system for the New Year. If your business needs assistance addressing how to streamline the cash flow system in your company, The Finance Team can help. We have a team of highly experienced finance executives who can render the insight you need for the amount of time that you need it.
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