CASH FLOW IMPROVEMENT

Once you have forecast your cash flows, improving them is then a matter of:

• controlling the cash you have
• improving the cash flow from normal trading by reducing your investment in working capital and reducing the cash going out of the business
• getting more cash in from other sources.

Controlling the cash you have

As you prepare a ‘central’ cash flow forecast it logically tends to follow that to efficiently manage the business’s cash you should:

• Centralise control of cash receipts, payments and forecasting (and forecast regularly on a cleared funds at bank basis). You can then prioritise and schedule payments so the available cash is best used for the benefit of the whole business, rather than being used by individual mangers, sites or branches as they see fit.
• Roll forward the cash flow forecast on a regular basis, reviewing performance against forecast each time you do so to pick up any variances that need to be investigated or which can be used to improve the next forecast’s accuracy.
• Increase where appropriate the level of authority required for purchasing or payments so that cash is not wasted or committed outside of the central forecasting regime.
• By preparing a cash flow forecast you may be able to identify any areas where the cash is leaking out. Are particular branches, sites or parts of the business losing cash? If so, target these areas for specific reviews and remedial action.

Improving the cash flow from normal trading

Many businesses have a surprising amount of money tied up in debtors who are not effectively chased for fear of losing future business. This ties up vital working capital and is often the first place to look for funds.

Review the debtors ledger and take action to:

• reduce credit terms to customers
• target and get in overdue debts.

If as a result you find that credit control procedure or practices are poor, mark this as an area for specific action as part of your post-acquisition business improvement plan. In the meantime, introduce tougher credit terms for customers.

Similarly businesses may have too much money tied up in stock:

• Reduce finished goods stock (e.g. by a sale of slow moving or old items), but be careful with such strategies and consider the risks and consequences (e.g. is dumping stock in your normal markets going to spoil your efforts to increase normal sales?).
• Complete work in progress and turn it into sellable finished goods as soon as possible.
• Analyse how often the individual lines of raw material stock are turning to identify slow-moving lines for inquiry and action. Why are you holding such stocks? Can these be disposed of or returned to the suppliers? Can you seek your supplier’s agreement to provide you with consignment stock whereby they deliver your stock on-site which you pay for only as you use it? While you’re talking to suppliers, are you actually getting the best credit terms available?
• Review your production management. (Particularly if you are building, say, batches of sub assemblies, does this mean that you are deliberately tying up cash in parts that will not become finished goods for a long time? Can you move to ‘just in time’ production?)

Just as with everything else in life, what you don’t spend, you get to keep, so the cancelling of discretionary expenditure such as payments of dividends and the reductions in overheads that you may be taking to improve profitability will also help to improve the cash flow.

As capital expenditure on new plant and equipment tends to involve large sums it should be scrutinised carefully to ensure that both the affordability and the business case for making the investment stand up.

Getting in more cash or credit from elsewhere

Other than trading, other possible sources of raising cash if this is needed are selling assets, raising new borrowings or obtaining investment.

• Review the assets on your balance sheet to identify:
  • surplus fixed assets (land and buildings, plant and machinery, motor vehicles) that can be sold
  • assets that could potentially be made surplus (and then sold) by sub-contracting out your manufacturing processes
  • essential fixed assets that can be sold and leased back to provide cash
  • under-utilised plant and machinery capacity that can be hired out, or spare factory or office space that could be sub-let
  • separable and saleable investments, subsidiaries or any parts of the business (e.g. a specific branch).
• Is there any equipment lying around that is not even on the balance sheet that can be sold?
• Can you use asset based financing (including factoring or discounting your debts) to obtain more borrowings against your assets than are available from the bank under its debenture values?
• Do you have any unpledged assets that can provide security for new loans, such as brands, trademarks and other intellectual property rights?
• Using your cashflow forecast, seek to negotiate an extension of your existing bank facilities or other borrowings to cover the forecast requirement. If appropriate, seek to agree deferment of loan repayments or to roll up interest for later payment.

If seeking to borrow further funds, always consider carefully your business’s ability to meet the payments in both the short and long term before taking further money. If you are borrowing because the business needs cash, you do not want to dig yourself deeper into debt that you cannot afford to service.