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Passionate about your businessPassionate about your business
Cashflow: Cashflow: Keeping You in Keeping You in
the the Black!Black!
I. Presentation purpose to highlight following:
1) the key importance of cash and cashflow to businesses of all sizes
2) provide some ‘real life’ practical tips on how to apply cash flow management techniques within YOUR business
II. Common misconceptions within SMEs like:
1)confusion between ‘business profits’ and ‘cash’
2)cashflow forecasting is a highly technical tool for larger businesses only!
BACKGROUNDBACKGROUND
•A common phrase used in the UK is that 1 in every 5 new business start-ups fail within the first 5 years of trading.
•Primary reason for failure of those business – simply run out of cash.
•How many times have you heard the phrase ‘Cash is King’ ?
•On that basis how often are SMEs placing primary focus on cash or cash management? How important is cash generation in YOUR business?
•Accountants just as guilty! Focus on Profit and loss rather than focusing Clients on cash and the practical management of cash and their ongoing cash. requirements
BACKGROUND BACKGROUND
• ‘Profit’ is the surplus remaining after total costs are deducted from total revenues
• An accounting view is that profit reflects a reduction in liabilities, increase in assets and an increase in owner’s equity providing the resources for investing in future operations (and it’s absence may result in the extinction of the business).
• ‘Cash’ means access to ready money in physical form that can simply be exchanged for goods or services.
• In accounting terms, cash includes money in hand, petty cash, bank account balances, but can also include marketing securities, unutilised overdrafts or lines of credit.
• Q.E.D without the existence of Profit it is unlikely that the business will have any cash, however just because you make Profits does not necessarily mean that the business has Cash e.g. cash at the bank.
• Therefore knowing the difference between Turnover/Billings/Income/Profits AND Cash is really valuable for SME business owners.
‘‘PROFITS’ and ‘CASH’PROFITS’ and ‘CASH’
WHY IS CASH AND CASH MANAGEMENT IMPORTANT?
1.To pay your rent and marketing costs
2.To pay your staff
3.To pay VAT, PAYE/NI, Corporation tax
4.To invest in the services and resources that your business requires to sustain and maintain growth
5.To pay Yourself (THIS IS IMPORTANT!)
6.To be able to take advantage of business opportunities as and when they may arise
CASH IS KING!CASH IS KING!
Key differences between a profitable business and a cash generative (cash positive) business:
•TIMINGS AKA PAYMENT TERMS - Customers paying on extended terms, not paying on time or at all, credit limits.
•POOR MANAGEMENT OF COST/OVERHEAD COST BASE - rents, marketing and staff costs rising faster than sales (typically during growth phase).
•POOR SUPPLIER MANAGEMENT – too many suppliers, agreeing to short payment terms.
•POOR UNDERSTANDING OF TRADING PATTERNS – seasonal trading, large customer projects.
PROFITS VS CASHPROFITS VS CASH
WHY NOT?
•It’s technical and something for accountants, not for business people!
•As a business owner, I don’t have time for this additional admin burden!
•We are not in a sector where we can dictate terms to our Customers i.e. there is nothing we can do!
WHY?
•Keep it simple i.e. just looking at payments the business will make and receive now and in the coming weeks !
•See previous slides i.e. avoid stress at VAT quarters, take a regular salary!
•A number of small changes in business activities and internal processes can make big differences over time!
•Apply the ‘No surprises’ mantra i.e. If you know about it then you can take action!
CASHFLOW MANAGEMENT AND CASHFLOW MANAGEMENT AND FORECASTING: WHY?FORECASTING: WHY?
CUSTOMERS & SALES
1.Upfront or Deposit PaymentsGet paid by your Customers in cash at the point of making a sale.
2. Express Payment Terms ClearlyBe clear to Customers on terms where credit is offered e.g. how much, for how long, what happens if payment terms exceeded.
3. Implement a Credit Control Process (and follow it)Ensure that there is a formal credit control process in place which staff are familiar with, and make sure it is followed routinely each month e.g. invoice, statement, contact 1, contact 2 etc. 4. Integrate Credit Control Across the BusinessEnsure that other staff in the business who already hold a relationship with Customers are involved in the credit control process e.g. sales staff, Account directors etc. They can use their counterparty to help resolve the issue in a friendly and collegiate way.
5. Understand the Supplier Payment Processes of Your CustomersDealing with a Customer base of individuals or SMEs is different to dealing with larger businesses e.g. Supermarkets. These have very regimented processes for paying their suppliers, so make sure you know and understand them.
10 PRACTICAL STEPS TO MANAGE CASH 10 PRACTICAL STEPS TO MANAGE CASH
SUPPLIERS
6. Negotiate Extended Payment Terms with SuppliersAs with your own business, terms are there to be (sensibly) negotiated, hence if you are facing extended terms from your Customers , try and mitigate by obtaining similar terms and/or higher credit limits from your own Suppliers.
7. Proactively Manage (or Cull) your SuppliersSME’s often end up dealing with a growing variety of Suppliers for a range of reasons, necessitating multiple invoice/month end statement reviews, additional small payment amounts, varying costs etc. Amalgamate purchasing via a smaller number of Suppliers along with renegotiated terms and/or costs.
8. Delay Payments to SuppliersThis approach is unlikely to endear you to your Suppliers, however on occasion you may be able to meet (a timing) shortfall by holding Supplier payment(s) for a few days to fund other more important requirements.OTHER
9 . Investigate other Payment or Sales ChannelsSometimes it may be worth paying additional fees to obtain Customer monies sooner. Alternatively, an existing Sales channel may be an excellent way to generate business activity in the short term, but is expensive and a barrier to growth in the medium/long term, requiring the business to proactively develop other sales channels e.g. Groupon.
10 . Use an Overdraft or other funding optionsWhere there are swings in cashflow due to seasonality or foreseen upcoming cash commitments, then consider the use of an agreed overdraft facility, factoring or short term loan funding to enable the business to trade as normal
10 PRACTICAL STEPS TO MANAGE 10 PRACTICAL STEPS TO MANAGE CASHCASH
•A large SME operating in the media sector
•Customer base a mix of larger SMEs and multinational businesses
•Seasonal business i.e. based on the Summer/Winter nature of it’s larger projects
•Losses in first half of the financial year and all profits earned in second half
•Larger projects required 4 – 8 months of work incl. significant expenditure on travel, staff, freelance, photography, agency costs
•Bank debt, requiring quarterly repayment, a legacy of a management buyout
•Global expansion into Asia and Middle East required internal funding
•Cash management was a core priority across the whole business and driven by the finance team
CASE STUDYCASE STUDY
Key focus on cash management in the business resulted in the development of a simple 13 Week Cashflow report i.e. a mix of cash inflows/outflows in prior month and 8 week forecast.
1.Credit control was tasked with ensuring that Customer payment processes were strictly adhered to and problems flagged immediately
2.Sales staff and Key Account Directors were incentivised to ensure that any negotiations on renewals of existing or new contracts would involve the finance team and focus on profit margins AND payment terms
3.On large or extended projects, Key Account Directors had to estimate costs during the project at the outset and ensure that Customers were making payments on account to match outgoings
4.The Supplier base was dramatically culled i.e. fewer Suppliers providing more services at better rates and on slightly extended terms (with discounts for early payment)
5. Separate savings accounts were maintained specifically for VAT, PAYE/NI and Corporation tax and loan repayments
6. An overdraft facility had been agreed with HSBC with fees based on usage of the facilities
7. Each week the 13 Week Cashflow report was compared against the actual cash inflows and outflows for that week to identify any issues (late payment etc), with action(s) taken as necessary
CASE STUDY - OUTCOMESCASE STUDY - OUTCOMES
CASE STUDY – 13 WEEK CASHFLOW REPORTCASE STUDY – 13 WEEK CASHFLOW REPORTROLLING 13 WEEK CASHFLOW REPORT
PERIOD W/E07/10/16 W/E 15/10/16 W/E 22/10/16 W/E 29/10/16 W/E 05/11/16 W/E 12/11/16 W/E 19/11/16 W/E 26/11/16 W/E 03/12/16 W/E 10/12/16 W/E 17/12/16 W/E 24/12/16 WE 31/12/16£ £ £ £ £ £ £ £ £ £ £ £ £
OPENING CASH POSITION 265,000 365,000 395,000 340,000 375,000 238,000 448,000 468,000 418,000 293,000 268,000 528,000 398,000
CASH RECEIPTS
Current Sales Ledger
- Winterfell Plc cash receipts 150,000 - - 75,000 - 150,000 - 55,000 - - - -
- Casterly cash receipts - - - 55,000 - - - - 55,000 - - - -
- Riverrun cash receipts 15,000 15,000 15,000 15,000 7,500 15,000 15,000 15,000 15,000 - - - -
- WorldPay cash receipts 2,500 60,000 45,000 15,000 5,000 45,000 40,000 15,000 7,500 - - - -
- Commissions - - - - 25,000 - - - 20,000 - - - -
Forecasted Sales Ledger
- Casterly cash receipts - - - - - - - - - - - - 75,000
- Qarth Plc cash receipts - - - - - - - - - - 250,000 - -
- WorldPay cash receipts - - - - - - - - - 45,000 55,000 35,000 17,500
Other - - - - - - 50,000 - - - - - -
TOTAL 167,500 75,000 60,000 160,000 37,500 210,000 105,000 30,000 152,500 45,000 305,000 35,000 92,500
CASH PAYMENTS
Overheads - Recurring
- Barclays Company Credit Cards (VK/AH) (25,000) - - - (32,000) - - - - (35,000) - - -
- Rent - Derwent (17,500) - - - (17,500) - - - (17,500) - - - -
- Rates - K&C (10,000) - - - (10,000) - - - - (10,000) - - -
- Staff Salaries - - (75,000) - - - - (80,000) - - - (110,000) -
- HMRC Payments - PAYE/NI - - (40,000) - - - (40,000) - - - - (55,000) - - HMRC Payments - VAT - - - - - - - - - (25,000) - - - - HMRC Payments -Corporation Tax - - - - - - - - - - - - (85,000)
- HMRC Payments - VAT
Suppliers - Current Creditors Ledger
- Ibben Media payments - - - - (55,000) - - - (75,000) - - - -
- Google Adwords payments (15,000) - - - (15,000) - - - (15,000) - - - -
- Yunkai payments - (45,000) - - (45,000) - (45,000) - (45,000) - - - -
- Other Supplier payments - - - (125,000) - - - - (125,000) - - - -- - - - - - - - - - - - -
Suppliers - Expected Creditors Ledger
- Ibben Media payments (75,000)
- Google Adwords payments (15,000)
- Yunkai payments (45,000) (45,000)
- Other Supplier payments - - - - - - - - - - - - (155,000)
Other
TOTAL outgoings (67,500) (45,000) (115,000) (125,000) (174,500) - (85,000) (80,000) (277,500) (70,000) (45,000) (165,000) (375,000)
NET Cash Inflow (Outflow) 100,000 30,000 (55,000) 35,000 (137,000) 210,000 20,000 (50,000) (125,000) (25,000) 260,000 (130,000) (282,500)
CLOSING CASH POSITION 365,000 395,000 340,000 375,000 238,000 448,000 468,000 418,000 293,000 268,000 528,000 398,000 115,500
CLOSING CASH RESERVES - BANK ACCOUNTS - OCTOBER 2016 £ - Current Account 125,000 - Active Saver Accounts 150,000
TOTAL 275,000
ACTUAL FORECAST
Put cash and generating positive cashflow at the centre of YOUR business
Are there any practical steps that you can take tomorrow to better manage your cashflow?
Consider changing or amending some of your existing business processes to generate cash earlier
Start looking ahead (or forecasting) for upcoming cash outflows e.g. Loan repayment, tax payment, bonuses etc., and plan ahead for them
If you know one, get a good accountant to work with you on putting these practices into place in the business . . .
TAKE ACTION NOW!TAKE ACTION NOW!
