Money Management Must Be the Focus for Company When Times Are Tough

Whilst profit and turnover are important actions of business performance but the primary focus must shift to cash when times are as challenging as they are at the start of 2011 and lots of businesses are finding themselves in problems.

The most immediate indicator of the way a business is performing is cash flow and it can also provide a caution signal that action needs to be taken to prevent a slide into bankruptcy.

Close attention to cash flow should provide a clearer picture of the immediate state of the business but while it might be possible to adjust to strengthen incomings against outgoings this is only going to become a holding operation.

The business must also take a look at its business plan and business structure, preferably with the help of a turnaround adviser. An objective outsider working as part of the business team to secure its medium and longer term future may identify basic weaknesses that undermine the ability to control cash flow.

The first step in managing money is to construct a 13-week cash flow forecast to help identify risks and actions that can be taken to reduce all of them. It should include income from sales and other receipts and outgoings, both to ongoing obligations such as lease wages and finance and to lenders.

The business also needs to control cash on a daily basis, with payments made on a priority basis with purchases approved by an authorised person who is aware of their effect on cash flow. This will avoid the risk associated with returned cheques. It is also advisable for any business to talk to the bank and keep this aware of what is being done to maintain things under control.

If the forecast is definitely showing that there is a mismatch within the timing of money coming in and fixed amounts that have to be paid out (such as leases for buildings plus equipment, wages and supplies) the cash flow forecast will show in which the problems are and suggest exactly what needs to be tackled and the order in which to do so.

For example , a business may have long-standing customers who are themselves facing issues and for the sake of retaining their business may have been allowed extra time to pay invoices. Action is needed, nevertheless , if this is beginning to push the business towards insolvency. It may be that an set up can be made with the customers to pay exceptional invoices in small amounts over an agreed period, which will keep at least some money coming in and preserve the relationship with all the customer.

In the same way, the company must manage payments against receipts by prioritising them and paying out of cash received in order of priority. Priority payments will be needed to keep the company going such as purchasing materials exactly where suppliers are often on stop.

The particular intensity level of cash management depends on how severe the cash flow circumstance is.
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Steps should be taken to improve cash flow by looking at prices, staffing, overheads and all other costs to think about whether there are cost savings that can be made. Does the company really need three fork lift trucks or can it control with two or even one, such as. Is it possible to renegotiate payments and costs with suppliers or reduce the amount of supplies ordered? It is in their interests to negotiate since they too will want to survive and retain business. It may be that they will accept a rearrangement associated with, say, quarterly payments to monthly obligations to keep things under control.

Similarly, are the staff fully occupied? If not, and they are valuable people the business will not want to lose, it may be worth trimming overtime or negotiating reduced hours or reduced wages. If people feel included in the decision making and are almost all working together to help the company survive agreements can be reached that will help the cash stream situation in the immediate future while also protecting the longer term potential.

Tight control of cash coupled with a thorough look at the business model and a realistic company plan will go a long way to help a business survive in difficult trading conditions.