Is cash really king?
In some ways, being in business can be like playing a game of poker. Both require a good strategy to be successful, a certain level of speculation risk on the market (although this risk can be reduced in business through market research techniques) and you can end up losing in both if you don’t manage your cash properly.
Every successful business has a strong marketing strategy which dependent on the type of industry, may require a substantial investment of cash. The cycling industry for example is very brand focused and so to maintain product brand awareness, it is necessary to invest significantly and regularly in things like trade shows, magazines and even sponsorship.
If cash levels within a business start to drop dangerously low, then expensive marketing activity is often the first to be pulled to save money since it is one of the few areas of the P&L where costs can be cut at short notice. However, pulling back on marketing can lead to lower sales which ultimately can then mean lower levels of cash inflow going forward. It is therefore not always the most effective solution on its own to improving a company’s cash position.
Other ways to improve the cash position could include:
- Invoicing customers promptly with minimal credit terms;
- Having effective credit control processes in place;
- Offering customers early payment settlement discounts;
- Asking customers for part payments upfront;
- Negotiating longer credit terms with suppliers;
- Offering customers several different ways to pay; and
- Preparing regular cash forecasts to allow more time to prepare for pinch points in liquidity.
An effective cash flow forecast need not be complicated and a good Finance Director will be able to prepare one that will provide you with a projection of net cash flow for the business over at least the next 12 months. Like the weather forecast, projections become increasingly less accurate the further in to the future you go as assumptions used may change due to both internal and external factors. However, preparing a cash flow forecast regularly in combination with some or all of the effective cash management techniques suggested above will collectively help to ensure liquidity problems are avoided.
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