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24 April 2016

Tips for keeping control of cash

There is an old adage in business – turnover is vanity, profit is sanity, but cash is reality. Many business managers are trained to focus on generating revenue and creating profit and clearly, revenue growth is needed to cover fixed costs and create a return on capital employed (ROCE). However, according to Dun and Bradstreet 90% of small business failures are caused by poor cash flow. This means running out of working capital or access to short term cash to pay suppliers, employees and the day to day costs of running your business. This situation can be particularly acute when a business is growing quickly, leading to the occurrence of ‘over trading’. This is a situation where potential fast revenue growth creates the need for investment in additional stocks, employees and even additional business space. In this situation additional investment maybe required to fund the growing cash needs but all businesses can benefit from reviewing the current situation to identify where cash may be ‘locked’ in the business. This can arise if stocks are purchased in advance and are then left in the business waiting to be sold resulting in cash being tied up for long periods of time – not to mention the cost of the space being occupied. The other area to look at is debtor control – do you know how long it takes customers to pay you and how much is currently outstanding. Cash ‘locked’ up in debtors can be released by taking part payments in advance or deposits with the balance due on completion of the job. Another technique to improve cash flow focuses on taking reasonable credit from suppliers to balance the cash needs whilst waiting for payments from customers.

Finally, keeping an accurate cash flow forecast is essential for monitoring cash needs on a day to day basis so that any potential cash flow shortages can be planned for and action taken to avoid a potential cash crisis. Barclays provide excellent guidance on how to do this on their business support website.

For a quick guide to managing your cash flow – take a look at our ten tips.