While profit and turnover are important methods of business performance but the main focus must shift to cash when times are as difficult as they are at the start of 2011 and a lot of businesses are finding themselves in difficulties.
The most immediate indicator of the way a business is performing is definitely cash flow and it can also provide a caution signal that action needs to be taken to prevent a slide into bankruptcy.
Close attention to cash flow should provide a clearer picture of the immediate condition of the business but while it may be possible to adjust to strengthen incomings towards outgoings this is only going to become a holding operation.
The business must also take a look at its business plan and business model, preferably with the help of a turnaround mechanic. An objective outsider working as part of the business team to secure its medium and longer term future may identify basic weaknesses that undermine the ability to control cash flow.
The first step in managing cash is to construct a 13-week income forecast to help identify risks and actions that can be taken to reduce all of them. It should include income from sales and other receipts and outgoings, both to ongoing obligations such as rent wages and finance and to creditors.
The business also needs to control cash on a daily basis, with payments made on a priority basis with purchases approved by a good authorised person who is aware of their impact on cash flow. This will avoid the risk associated with returned cheques. It is also advisable to get a business to talk to the bank and keep it aware of what is being done to maintain things under control.
If the forecast is showing that there is a mismatch in the timing of money coming in and fixed amounts that have to be paid out (such as leases for buildings plus equipment, wages and supplies) the cash flow forecast will show in which the problems are and suggest what needs to be tackled and the order by which to do so.
For example , a business may have long-standing customers who are themselves facing complications and for the sake of keeping their business may have been allowed extra time to pay invoices. Action is needed, however , if this is beginning to push the business towards insolvency. It may be that an arrangement can be made with the customers to pay excellent invoices in small amounts over an agreed period, which will keep at least some cash coming in and preserve the relationship with all the customer.
In the same way, the company must manage payments against receipts by prioritising them and paying out of money received in order of priority. Priority payments will be needed to keep the company going such as purchasing materials exactly where suppliers are often on stop.
The intensity level of cash management will depend on how severe the cash flow scenario is. Steps should be taken to enhance cash flow by looking at prices, staffing requirementws, overheads and all other costs to consider whether there are cost savings that can be produced.
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Does the company really need three shell lift trucks or can it manage with two or even one, one example is. Is it possible to renegotiate payments and prices with suppliers or reduce the amount of supplies ordered? It is in their passions to negotiate since they too may wish to survive and retain business. It might be that they will accept a rearrangement of, say, quarterly payments to monthly payments to keep things under control.
Similarly, are all the staff fully occupied? Otherwise, and they are valuable people the business will not want to lose, it may be worth reducing overtime or negotiating reduced hrs or reduced wages. If people feel included in the decision making and are all of working together to help the company survive contracts can be reached that will help the cash movement situation in the immediate future while also protecting the longer term potential.
Tight control of cash coupled with a thorough look at the business model and a realistic company plan will go a long way to help a company survive in difficult trading problems.