Most businesses will experience periods of lower sales and times when losses may be incurred as expenses exceed sales income. With a sound business the position is recoverable by gaining extra sales growth or reducing expenditure. A business that runs out of cash resources is dead in the water.

Debtors and sales income management

The objective is to obtain payment from customers as fast as possible improving cash flow and minimising the risk of bad debts and not being paid at all.

Payment terms offered to customers should be clearly stated and fixed as standard accounting figures according to the amount of funding the business is prepared to offer its clients. Because that is exactly what credit terms to customers is, free cash funding in exchange for eventual sales income.

Consideration should be given to using a cash discount system to encourage sales invoices to be paid faster. In some businesses it would be appropriate to obtain up front deposits and scheduled payments. Review this practise to obtain a greater proportion of payments faster to improve liquidity.

New customers should be subjected to a strict credit check. All new customers where credit check details are not available should be invoiced by the accounting function on a pro forma basis. Any businesses who fail to meet the highest credit score required should remain on a pro forma invoice basis.

Each business should determine a set of credit control procedures including issuing sales invoices, producing customer statements of outstanding balances and a standard set of credit control letters that actually get the cash in. An essential process in the credit control procedure would be to ensure the accountant or bookkeeper always issues sales invoices and customer statements promptly.

Incorporate into the terms of trade a set of rules to invoke interest payments for late payment and late payment debt recovery costs. In the UK the Late Payment of Commercial Debts (Interest) Act 1998 sets out the statutory rights of business to claim interest and costs.

Consider the possibility of factoring sales invoices due from debtors either by selling the sales invoices to a third party or raising cash on the value of those invoices pending payment. Factoring has the disadvantage of often not being cheap but does have the advantage of generating a regular stream of cash.

Bad debts have a double impact on any business and all possible steps should be taken to reduce the risk. A bad debt not only uses valuable resources in chasing the debt with the negative impact on cash flow and liquidity but also is a straight loss to the net profit and a strong indicator that the accounting function is failing the business.

Creditors and expenditure management

The objective is to extend the time allowed for payment of expenses the business incurs.

Consider the frequency of all payments made to suppliers. Small business often has alternative payment terms available for the payment of taxes. In the UK value added tax can be paid quarterly or monthly, vat cash accounting can ease the tax liability due in critical periods and paye payments can be paid quarterly rather than monthly for smaller businesses.

Consider the frequency which wages and salaries are paid. A sensitive area since it involves the most important people to the business success but adopting a payment period to coincide with the receipt of cash from customers may in some circumstances balance liquidity.

General creditors are a major area to be addressed in terms of both the amount of credit received from suppliers and the time required to pay those creditor accounts. Larger orders on extended payments terms creates a risk area should the goods not be used but can greatly assist cash flow as the business is effectively borrowing free cash from its suppliers.

Stock levels are crucial to financial management of the creditor total. High stock levels use valuable working capital which is offset in part by the level of creditors. Higher levels of stock financed by free credit from creditors lowers the cash flow requirements on the other parts of the business.

Terry Cartwright is an accountant at DIY Accounting designing Small Business Accounting Software on excel spreadsheets providing complete Bookkeeping solutions for small to medium sized companies plus accounting packages producing automated copies of the Self Assessment Tax Return for self employed business.

Banks provide many different types of financial management services, financial management solutions and financial management systems to their customers of all sizes, but especially to businesses who typically rely on the more sophisticated and powerful business financial management offerings. Business cash management is one of the many essential services that are offered.

Cash management services for organizations from small businesses to large corporations can help assure that the business has the cash on hand that is needed to conduct transaction for their customers. This keeps the customers happy and returning to the business because they are able to make their purchases without problems.

At the same time, the financial services that banks offer their business customers help to make their routine banking needs simpler, faster, more efficient and cost effective. Making the business financial management solutions and systems easy to operate and manage helps to assure that business owners and managers can focus their time and attention more on running their businesses effectively and profitably, and less on dealing with the business financial management issues.

Cash flow is crucial to a smoothly running business operation and so the purpose of these financial services is to make sure that the cash that is required for the daily business operations is properly balanced. This means having enough cash on hand each day in order to conduct business as needed and yet also minimize the amount of cash that is in use so that the maximum available assets can be invested to earn a return.

There are a number of different cash management products and systems available these days from banks and other financial services companies. These various financial services and solutions vary widely and the best solution will primarily depend on the particular business, the industry it is operating in, how the business overall is being managed, and what the business financial management goals are.

Many companies go to great lengths to carefully keep track of cash flow, both incoming and outgoing, and providing that cash flow data to one of their financial managers. This person, in turn, can then take this information, analyze it and generate accurate predictions about the future cash needs of the business and pass these findings along to the cash management services in order to produce the best business cash management plan possible.

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