Cash flow FAQ

How can entrepreneurs effectively manage and plan their cash flow close to financial year end?

Cash flow is often glibly used as a general term even when you have not done the basics right. The basics are to manage all your current assets and liabilities with a tight reign.

This simply means that your stock level should be managed to remain within industry norms based on your seasonal turnover levels. In the down season, which is often after Christmas and New Year, when factories are slow to open up and consumers have less money to spend, you need not have the same high level of stock than when it is peak season. Negotiate for returning slow moving items in exchange for faster moving stock with the suppliers of your stock. Keep the keys of your store yourself and put a limit on stock shrinkage. Keep proper stock records and verify it regularly with physical stock.

Lesson 1 is to manage your stock levels down to acceptable levels for the season you are in. This will free up working capital (cash).

You should always manage your debtors (those clients of yours that buy from you on terms). There should be tightly managed limits for each debtor and you should stop supplies if that limit is reached. There should also be definite credit terms for each debtor and should they not pay within the agreed term, then supplies should be stopped. Communication with the debtor should also take place all the time whether they reach the due date or start to test their credit limit. The client want to clearly know where they stand with you and any action should not be a surprise to them as they know that you are friendly, but also tough when it comes to the terms and conditions of supplies on credit. Early settlement discounts to encourage debtors/clients to pay you earlier should also be considered. Always keep proper records of communication with your debtor/client, even if it was a telephone call you need to make a file note and always have a proper age analysis per client. This is normally computer generated and should be a help to manage your outstanding debtors.

Lesson 2 is to tightly manage your debtors both from the side of how much credit you provide them and also from the side of by when they need to pay for supplies on credit.

You should also tightly manage your bank account and not allow it to exceed the limits set by the bank. Should you run into trouble it is better to communicate with your relationship manager or bank manager before you reach your credit limit. That means you need to have proper cash flow projections with clear knowledge when your debtors will pay you and when you need to pay your creditors. It will also entail planning the payment of your costs such as rent, salaries and wages and the like that it forms part of your cash flow planning. It is important to keep your cash book (bank account in your books) up to date so that you can use actual numbers when planning your cash flow, especially towards month end and when it is your down season.

Lesson 3 is to play open cards with your banker and to prove to him/her that you are tightly managing your cash flow in good and bad times.

You also need to tightly manage your creditors. Stick to your credit limits. Pay them on time. Renegotiate your terms and limits once you have built a track record with your suppliers/creditors. Ask them if they would consider supplying you with consignment stock for especially the high value items. They benefit as they use less storage and they have more area than normal to display their products at different premises. For you it is also beneficial as you only have to pay for the stock when it is sold. An arrangement must just be made to keep record of consignment stock. Always keep file notes of all conversations and agreements with your suppliers. Also keep an age analysis per supplier and also make sure that you reconcile monthly with your supplier statements and follow up on all reconciling items.

Lesson 4 is to play open cards with your suppliers and to remain within their limits and terms.