Q: What is an important factor to consider when running a Business?

Cash is the life blood of every business. It is what enables a business to survive and prosper and is the primary indicator of business health. While a business can survive for a short time without sales or profits, without cash it will perish. For this reason the inflow and outflow of cash needs careful monitoring and management. The outflow of cash is never a problem, keeping the money coming in on a regular sustained basis is the tricky part.

The owner of a struggling business can be under all sorts of pressure. It can be a lonely place for principals who find themselves fending off calls from creditors, finding supplies are drying up because accounts are in arrears and the Bank is applying pressure to bring facilities back within terms.

This is the “pressure cooker” that many businesses find themselves in.

When a cash crisis looms, there is little time to waste on looking back. Positive action is what’s required. It is imperative to act quickly, and decisively, to address the situation.

Tips to improve cash flow

In order for a business to meet its financial commitments it will need to properly manage its cashflow. Set out below are some suggestions to save costs and improve cash flow:

  1. Prepare a cashflow forecast to include all receipts and payments. The cash flow forecast should be assessed on a monthly basis.
  2. Monitor actual cash flow performance against projections and ensure all financial information is kept up to date to allow for quick informed decisions to be made.
  3. Know the cash burn rate of the business, that is the rate at which the business is consuming cash on a monthly basis.
  4. Identify the timing of major cash outflows i.e. instalment arrangements, revenue payments, capital repayments, bank repayments, payment to major suppliers etc.
  5. Take action to reduce the amount of cash tied up in the business. Cash might be freed by chasing outstanding debtors harder, by reducing terms of credit for new sales, reducing stock levels or disposal of surplus assets.
  6. Prepare customer invoices immediately upon delivery of goods or services. Waiting to prepare invoices at the end of the month may be adding as many as 30 extra days to your cash flow conversion period.
  7. Have an efficient and effective credit control policy. Monitor customers’ use of credit and adjust the credit terms accordingly.
  8. Offer customers a discount for paying invoices early. For instance, if your usual policy is to have payment due in 30 days, offer a small discount to customers who pay within 14 days.
  9. Establish a deposit policy for work in progress. For example if you deliver a service, you can adopt a policy that customers pay a certain percentage of the total invoice upfront before the work commences.
  10. Free up cash by maintaining an appropriate level of stock.
  11. Preserve cash by maximising credit terms from suppliers.
  12. Negotiate payment terms if you know the customer cannot pay your full debt in one payment.
  13. Try to increase sales to existing customers. This may be easier than trying to find new customers. Make your customers aware of the full range of services and products you have to offer.
  14. It may be possible to deregister for VAT if turnover has fallen below the VAT registration thresholds of €37,500 per annum for services and €75,000 per annum for goods.
  15. If certain criteria are met it may be possible to switch from bi monthly completion of VAT returns to every 4 months or bi annual. Also a business can opt to account for VAT on a cash receipts basis if their turnover is less than €2m euro per annum.

To conclude, it is essential for all business owners who wish to survive and thrive in the future that they get their business fighting fit. Set out realistic goals for the next 3 to 5 years of where you are going and how you will get there.