In this second part of the series entitled "What do I HAVE to manage?" I address some of the specific ‘must-do’s’ about cash flow management.

SPREAD YOUR FIXED MONTHLY PAYMENTS.

Most small businesses I know pay very little attention to the date they commit to fixed, and regular, monthly payments.  As a result, a number of fairly substantial obligations can arise at a time when cash flow is at a premium, and all at the same time. 

For example, a business may have three instalment sale loan repayments of R3,000 each, rent of premises of R8,000, the telephone account of R2,000 and the cell phone account of a similar amount, all happening on the 1^st day of the month. 

It may be that most of the income for your business is only received on the 7^th day of the month (because although people tell you they’ll pay you on 30 days, they’re invariably a week or so late!), which means that for the six days preceding, you will be sorely stretched to meet your cash commitments.

Analyse all your fixed monthly payments in terms of the date on which they will normally have to be paid.  Then try to spread these dates for payment out across the month (as much as is possible), and especially after most of your income has generally been received. Most financial institutions will be amenable to re-scheduling your monthly instalment dates if you just ask them.

LOOK AFTER YOUR BANK ACCOUNT!

One thing I have noticed in my thirty-odd years of dealing with a number of South African banks is that they have an amazing corporate (technical) memory.  This is especially true nowadays with the advent of high-tech communication and computers.   Although people work in banks, in truth, the banks are run by systems!

One may think that only the ‘black’ marks are notched up on record, and this may well have been true in the days when your local Manager had authority to oversee your account, but today, the computer is all-powerful and all-seeing, and even the good things are noted!

Therefore, as long as you’re prepared to make sure that you NEVER (and I mean NEVER!) transgress the arrangements negotiated with the bank, then over time, you will build up a most enviable reputation for creditworthiness.  Your Banker will be only too happy to recommend you as a good credit risk to all and sundry!

And do you know why?

Well, – banks all over the world use a system known as ‘behavioural scoring" (BS.) It is based on the manner in which the customers, (you and I) operate our accounts.  The system is computer-based and picks up customers’ behaviour in relation to how they run their accounts. (Good, - or bad!).

These characteristics are weighted in terms of their capacity to predict future behaviour of the customer and are reviewed from time to time in the light of how the account is actually run.  Some of the information that is recorded is – the number of times the overdraft limit is breached and by how much, – the number of transactions moving through the account, – whether items have ever been dishonoured, – and how old the account is.  Talk about Big Brother watching you!

Being computer-based, the system is consistent and fair as it applies the same criteria to everyone.  Generally, I think it presently only applies to current accounts but will be extended to others.

Keeping your bank manager informed, IN ADVANCE, is imperative.  Just as imperative is ensuring that whatever you have told him will happen, happens. 

Don’t make promises you can’t keep.   He needs to know that you are reliable and that the information you supply him with is just as reliable.  With on-line access to Internet Banking, it is easy to keep ahead and with a simple daily cash flow forecast, on a spreadsheet, you can make sure that limits will never be exceeded.

And, be a little conservative when you do these forecasts! If you’re going to ask for a temporary extension to your overdraft facility, make sure you never use all you ask for.  And, – if you say you’re going to need it for two weeks, make sure you pay it back in ten days.   In that way you will build up a huge reserve of ‘brownie’ points with your bank.  This may come in very handy one day!

Now, I know that cash flow can get very tight from time to time, and managing the old bank account becomes increasingly more difficult. While I certainly wouldn’t recommend this as an alternative in anything but the most trying times, it is easier to fall back on the broad shoulders of creditors than it is to run afoul of the banks’ BS system.

Not only is it easier, but if it’s only for a short time, it can be whole lot cheaper too, as most creditors don’t start charging interest until you’re about 30 days overdue. (And the banks are charging a chunk of cash for a dishonoured cheque these days.)  So, rather than bounce a cheque on a creditor (which will tick him and your banker off!), talk to him, get him to wait a little while, and you’ll score hands down. But, talk to him first, - don’t just do it!

MANAGE YOUR CASH FLOW ON A MORE REGULAR BASIS (WEEKLY OR EVEN DAILY)

In distressed businesses, cash is vital.

 "You can’t talk about the future if you’re going to hit the wall tomorrow," I’ve heard it said. 

Start by drawing up daily, weekly and 13-week (three months) cash-flow projections.     Monitor all money flowing out and, on the flip side, press for faster collections, taking on the job yourself, if necessary.

Most small businessmen I know will visibly sag at this point!

 “I don’t know how to do a cash flow projection”, most of them will say.    Well, if you would like some help, I have put together a few simple spreadsheets, which make up an equally simple 13-week (three months) cash flow forecast, which I have called a Cash Flow Focus.  It’s not too complex to use if you’re comfortable around spreadsheets.  Just contact us, and we’ll gladly send the templates to you.

The key to its success is to keep it up to date every day.  It is comprised of:

• A schedule of fixed monthly payments reflecting the date on which they are normally paid. Just by allocating the payments into the weeks when they will occur will give you an idea of your cash commitments per week, for the next 13 weeks, and an indication of when your greatest cash requirement will occur.  I have found that just this schedule contributes very positively to your time management in terms of priorities!
• A current aged analysis for each of your suppliers and customers, including your estimate of when the amounts are likely to be paid/received, over the 13 week period. This will be determined by pre-arranged credit terms and limits, and how negotiable suppliers are to extended terms.  When you make your estimates, ensure that you are not too optimistic about your collections.  Sadly nowadays, people tend to make promises they can’t keep – and can let you down at the last minute; and may not even warn you about it either!  And if your customers don’t stick to their commitments, you won’t be able to meet yours to your suppliers.
• A forecast of future income and associated expenses.  This should be based on a soundly prepared budget, which is grounded in reality and erring on the conservative side. Don’t forecast income based on wishful thinking – be realistic, and take into account seasonal fluctuations as well.  This is very important – especially if you’re really in a hole right now.  You must be able to see some light at the end of the tunnel, and if you can’t forecast an improvement within the next year, you may have to consider pulling the plug!
• A summary of what your cash flow is likely to look like in relation to your banking facilities.  Playing with the figures on a daily basis within this forecast will enable you to keep ahead of any surprises, will relieve you of stress, and keep your suppliers and bankers happy.  One of the great things about computer spreadsheets these days is that you can introduce some ‘what-ifs’ into the equation; simply moving certain collections a week forward, and certain supplier payments a week back, can make a huge difference to the entire forecast!  Remember – make sure that your facility with your banker is never prejudiced – you may need this friend in the future!    -  In the next newsletter, I’ll cover the two most important  aspects of cash flow management – collections and stock management.

This entry was posted on Saturday, March 13th, 2010 at 10:26 am and is filed under Distressed Business, Finserv Insights. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.