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.

DAYS SALES OUTSTANDING FORMULA

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.

TURNOVER RATE FORMULA

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.