Cash Flow – the Lifeblood of the Organisation!

Cash Flow - Beacon InitiativeWhile most people are aware of the old saying that “Turnover is Vanity, but Profit is Sanity”, the other critical factor in the success of any business, is that “Cash Flow is Reality”.

Cash is the lifeblood of the organisation and so requires careful management.There is an important interrelationship between profit and cash flow and when this is understood the importance of good cash flow management is realised.

If there is little or no profit in an organisation, this will have an impact on cash flow which normally would require a cash injection from some other source such as finance or investment. In addition there can be a timing difference, positive or negative, between profit and cash and it is important that this relationship is understood.

A good system of management accounts provides the business with a real time view of profit, concentrating on key items such as turnover, margin, wage costs and other overheads.

The system for cash flow management needs to be designed to meet the specific needs of the business as the cash cycle will differ depending on the interaction of Stock/Debtors and Creditors.

Few organisations have a dedicated Cash Flow system and so most resort to using a spreadsheet. When a business is facing cash flow issues, timing is key!

The business must quantify the issue in sufficient time to allow action to be taken. Cash flow issues typically don’t happen overnight and a good system will allow for that essential early warning.
There are a number of things that can then be done to address cash flow difficulties;

Calculate

Identify both the amount and timing of the problem.

Is it just a short term timing issue or is there a more fundamental problem that requires a bigger solution?

Communicate

Communicate with the other stake holders; investors, the bank, Revenue Commissioners and suppliers.

Confidence

Confidence is key when communicating with the stakeholders and especially suppliers.

They will want to know that you know what’s going on, you are in control, you have a plan and that the business is sound.

Conserve Cash

Evaluate and prioritise payments between the ‘have to pays’ and the ‘want to pays’ – this is critical to ensure such things as supply of raw materials or product.

One solution that works well is a system of small/part payments to suppliers which lets them know that there still is some cash in the business. This is a good way to buy time in the short term.

Cash on Delivery

This can be particularly useful when dealing with suppliers with whom large balances have been accumulated. Often the supplier’s main concern is capping of their exposure and will negotiate cash on delivery for all new deliveries along with an agreed payment plan to deal with the outstanding balance.

In summary, cash needs to be managed and the way this is done differs slightly for each business, but however it’s done, the key point is that more resources should be committed to cash requirement forecasting. While a forecast may never be 100% accurate, if built on accurate assumptions, it will allow potential gaps in cash flow to be identified in sufficient time for action to be taken.

John Flynn - Beacon InitiativeJohn Flynn – Financial Consultant

John is part of the Beacon Initiative, Grow Programme Virtual Management Team, which can assist qualifying SME’s to grow through the provision of management expertise that may not be accessible to them currently

One thought on “Cash Flow – the Lifeblood of the Organisation!

  1. I have had a chance to work as systems accountant at the treasury department of a global engineering company, where I was responsible for cash flow analysis an budgeting. Due to the age and size of the company, they naturally had very good and professional cash flow system in place. Spreadsheet was used to calculate actual, estimated and budgeted figures.

Leave a comment

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s