UK: How To Avoid A Cash Flow Crisis

Last Updated: 8 December 2011

Is your company growing and profitable, but you still find yourself strapped for cash? It's an uncomfortable position; as a company grows, its need for cash increases, and you don't want to spend your time worrying about whether you have the cash to implement your decisions each day.

Here is a checklist of cash flow strategies and tactics that will help you to avoid a business cash flow crisis.

1. Communication

Good internal communication can prevent cash flow waste. Imagine your sales department taking orders, your marketing department spending cash on advertising, and your design team making changes to the prototype even as your production team creates your product ... it's a recipe for cash flow waste.

One of the most important things you can do to avoid cash flow waste is to get together members from each department who are working towards the same goal. Think of it as a product development committee that meets weekly to communicate status and avoid inappropriate action.

2. Purchasing

To avoid needlessly tying up your cash, your purchasing department should take action based on the information gathered from the status meeting described above. Inventory should not be ordered until the product is ready for production. If you have already ordered inventory, but your product will be delayed to market, talk to your vendor about extending payment terms. You may need to return or sell parts that are no longer needed.

Deal with your vendors honestly and quickly and you'll avoid having your cash wrapped up in unneeded purchase orders.

3. Marketing and sales

Co-ordinate your marketing and sales efforts with product availability. Also, determine ways to target those customers who have the ability to pay and pay quickly.

4. Cash collections

Once the new product is sold, your cash collection policy can make a significant difference to the amount of cash you have on hand. On average, how many days does it take to collect the cash after the work is done or the product has shipped? 30 days? 45 days? 90 days? The shorter the delay, the more money you have in the bank. Use the formula below to determine your average, then get together with your collections team to develop ways to lower that number.


Sales for the year ÷ 365 = average daily sales

Accounts receivable balance ÷ average daily sales
= Days Sales Outstanding

Benchmark: 45 days is a good goal

Here are some ideas to kick start your new cash collection policies:

  • Keep track of outstanding invoices.
  • If your payment terms are net 30, always call or mail a notice to remind the buyer at 60 days, at minimum. If you are having a cash crisis, consider contacting buyers when they are 5 or 10 days late.
  • Consider holding shipment of future purchases until late invoices are brought current.

Reducing your days sales outstanding may be one of the most important steps in increasing your cash flow. If your average sales are £1,000 per day, and your accounts receivable are £45,000, then your days sales outstanding is 45 days. Not bad. If you reduce that number by only two days, you've increased your cash flow by almost 5%.

5. Supplier payment

Paying all your suppliers on time keeps them happy and allows you a little flexibility in the event of a cash crisis. However, if you are having a cash crisis, you may have no choice but to delay payment.

To keep good relationships with your vendors, let them know if you expect payment to be late – and be realistic when giving them a future payment date. Once you make a promise, don't be late! A partial payment is often better than nothing at all, and can keep you from ruining your credit and relationship.

If you are unable to pay all your vendors, it may be necessary to determine a priority list for payment. Here's a typical priority list, based on how big a show stopper it would be to not pay:

  • Government – If you don't pay, there could be legal consequences.
  • Employees – If you don't pay, they will probably leave.
  • Utilities – If you don't pay, they could shut down your office and operations.
  • Sole source providers – What would you do without them?
  • Repeat suppliers – They'll probably be understanding if you call, and if they aren't, there are other suppliers available.
  • One-time suppliers – Unfortunately they are the lowest priority, because you don't expect to work with them in the future.

6. Engineering, design and production

Finding the balance between inadequacy and perfection is the name of the game here. Proper planning, realistic deadlines and input from all departments can help to streamline the process and minimise expensive design or engineering changes once production has begun.

7. Inventory

Striving to minimise the amount of inventory sitting idle, and projecting inventory balance, can help to increase cash flow and determine future needs. It may save money per item in the short run to manufacture in bulk, but consider doing a cost analysis of the out-of-pocket costs, how long you are out of pocket, cost of storage, and cost of reducing inventory that doesn't sell or becomes outdated.

It may seem obvious that the more frequently your inventory turns over, the better. But working out exactly how many times per year, on average, your inventory turns over can provide a measurable goal for the whole team to aim for.

For a small manufacturing company, inventory turnover six to eight times per year is a good benchmark. Of course, it varies from industry to industry: for example, a bakery would aim to have a daily turnover, or inventory turnover of 365 days per year.

Use the formula below figure out your turnover rate.


Inventory turnover = Cost of goods sold per year
÷ inventory balance

For example, if your cost of goods sold is £21,900 per year, and your inventory balance is £5,475, your turnover rate is 4 times.

The reverse is true when projecting inventory balance. Simply divide your cost of goods sold per year by your turnover rate. If your sales are not consistent throughout the year, do this on a monthly basis instead.

Creating operating strategies and tactics to maximise cash flow can help to reduce the likelihood of a cash crisis. No matter how busy you are, how fast your company is growing or how profitable you are, good cash flow management is critical to business success.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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