Insights


Cash flow forecasting isn’t just an annual process in the same way a puppy isn’t just for Christmas.

Strange analogy?  Not really.  If you want to manage the behavior of a puppy – as opposed to adjusting your own behavior to accommodate its natural tendencies – you need to train your puppy and then continually reinforce that training to ensure it doesn’t adopt bad habits.

Similarly, if you want to optimize your business’ cash flow you should formulate and communicate your expectations through a cash flow forecast and then ensure the forecast (ie. your expectations) receive attention throughout the year, not just during the annual forecasting process. If you don’t do this, you may find yourself struggling to fetch debtors, while your creditors won’t play ball.

Implementation of a cash management strategy, and regular monitoring to ensure objectives are being pursued (possibly as part of a monthly management review including KPI analysis) will go a long way to ensuring that cash is performing to your business’ requirements.

Cash management strategies need to be appropriate, and will vary significantly from one business to another.  Some key initiatives to consider when reviewing your particular business’ cash management strategy include:

1) Implementing a robust credit application process, which includes:

–      A detailed agreement in which credit terms and conditions, credit limits, late payment penalties and retention of title clauses are clearly stated.

–      Conducting credit checks on all applications.

–      Ensuring customer purchases adhere to credit limits and ‘stop credit’ policies are applied.

2) Measurement of receivables turnover (ie. the number of days it takes for your customers to pay):

Accounts Receivable
Total Annual Sales ÷365 Days

Consider putting in place target collection periods and monitoring success, and incentivizing staff to meet business targets.

3) Pro-actively managing significant debtors through regular contact to confirm receipt of invoices and statements, and ensuring any issues are resolved on a timely basis.

4) Improving the month end process by forwarding statements (via email if possible) on the first day of the following month and embedding electronic invoices.  Consider requesting confirmation of ‘receipt’ of email.

5) Following up debtors immediately they fall outside terms, and ensuring staff have a clear procedure to follow regarding issuance of over-due and demand notices, and engagement of debt collection agencies.

6) Implementing internal controls to ensure collection activities are appropriately recognized and measured.

7) Ensuring accounts receivable staff are experienced and receive ongoing support and training.

So, back to the puppy: Taking your puppy to a training course will undoubtedly improve his behavior in the short term – particularly while he is attending formal classes and receiving just rewards for his efforts – but to ensure he continues to display his new skills on an ongoing basis he will require continual reinforcement in his day-to-day environment.

As discussed above, effective management of cash resources also begins with a formal process – the annual planning and budgeting cycle – but to ensure focus is maintained throughout the year business owners and managers should:

(i) implement cash management strategies to monitor cash movement; and
(ii) appropriately incentivize staff to achieve forecast objectives.

Happy forecasting!

Elizabeth Mawby was a former Client Director at Vantage Performance, one of Australia’s leading turnaround management and profit improvement firms – solving complex problems for businesses experiencing major change.

 

 

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