MANAGING CASHFLOW TO STAY IN BUSINESS

This article is based upon two assumptions - that the reader wants to stay in business and that the reader is in business to make money. In business, money to the corporate body is like blood to the body human - if it doesn’t circulate it doesn’t matter how much you have!

Every day firms and companies go out of business because their money is not where it should be. They may be (and often are) profitable on paper, but at a critical time they cannot pay their bills because the money is elsewhere. The two most common ‘parking places’ for working capital are Stock and Work in Progress, and the Sales Ledger. Other less justifiable resting places are extravagant fixed assets (premises, cars, etc.) and top-heavy administrative costs.

Stock holding may be regarded as excessive if its value is more than 1½ times the replacement lead time from suppliers. Work in Progress is sometimes difficult to reduce but care should be taken to ensure that delays in production through avoidable circumstances are minimised. If production cycles are lengthy, consideration should be given to obtaining deposits, payments on account or progress payments during the production cycle.

The Sales Ledger (the money owed by customers) is the biggest unsecured asset in many businesses, as well as being the most ‘liquid’ or easily converted into cash. Most small and medium-sized enterprises have a very ambivalent attitude to chasing overdue accounts. They have a universal fear that they will lose future business if they try to get paid for past business!

Recommended read (Payment Guidelines)