Business finance and cash flow management is a critical business area every business must get right to survive. This article suggests a number of areas that a business might address to ensure the business have sufficient liquidity and working capital to survive the credit crunch and continue in business to generate profit.
There is a fundamental difference between cash flow and net profit. Net profit is the bottom line of the profit and loss account measuring the net growth in financial value. Cash is the business liquidity and closely related to the changes in the value of the current business assets in the balance sheet representing the amount of money the business has at its disposal to generate further business.
Stock control management
The objective is to reduce the level of stock which uses working capital within the business.
Stock control is a major potential area where every business can become more efficient in its cash requirements. Stock comprises of four main elements, raw materials, work in progress, finished goods and consumable stores.. Each area can be managed to reduce the working capital requirement with an appropriate stock management system being adopted.
Raw material stocks can be reduced by setting a just in time stock control policy, negotiating better delivery schedules and reviewing order quantities with a view to reducing the value of stock held before it is required for production or sales.
Work in Progress is mainly a manufacturing area and governed by the manufacturing process however a review of the policies can produce efficiencies if excess products are left lying around waiting to be finished or excess materials are on the shop floor waiting to be used.
Standard levels of finished stock should be set to satisfy the requirement to supply all customers on time but avoid excess stock. Delivery schedules might be reviewed to ensure delivery times can be shortened to reduce the requirement for higher stock levels. Ideally the stock should come in one door and be invoiced out the other door the same day.
In some businesses consumable stores may be significant and where any significant working capital investment is required the policy should be reviewed to save cash by introducing stock control measures.
Profit margin management
The objective is to sell more cash flow friendly products.
Given a range of products within a business the gross profit and stock requirements and funding requirements may be variable. During a credit crunch the products offering the highest gross profit, fastest turn round and most economic use of working capital would offer the best options to reduce the credit crunch effect.
A sound management policy would be to review all products in terms of the working capital requirements and levels of gross profit margins with a view to concentrating sales growth in these product areas.
Financial investment management
The objective is to reduce the draining effect of capital investment in the business to protect the working capital requirements.
There are many cash flow issues but consideration may be given to how fixed asset purchases are financed. In days of the credit crunch business finance be to lease or buy major items on hire purchase than to buy outright. Different and alternate methods of financing investments can broaden the financial funding options open to a business and reduce the strain on working capital.
Consideration might be given to delaying the purchase of non essential renewable assets. For example the business may have a policy to replace the delivery vehicle or representatives car every three years. Delaying the replacement by six months saves valuable cash resources and protects the cash flow.
Consideration in larger companies with numerous investment projects may be to prioritise the fastest cash generating projects. Capital investment often requires high initial investment which is repaid slowly over a period of years and a reduction in approval rates for such projects can have significant impact on liquidity.
During the early days of a credit crunch and potential recession consideration should be given to reviewing all non or low performing areas of the business with a view to selling these business areas or assets ensuring they do not become a drain on the cash resources but instead produce a positive cash flow the remaining parts of the business can use to generate higher profits.
Business finance management
The objective is to achieve at lowest interest rates possible business finance for the business cash flow, working capital and investment requirements.
Planning is essential to make sufficient arrangements well before the cash is required t6o enable a satisfactory level of funding at an acceptable rate. Negotiating when a business runs out of cash is the very worst time to negotiate funding as it will cost more and may not be obtained at all.
There are benefits to reviewing the number of sources of business finance and funding available to the business and the interest being charged. Relying upon one funding source may be putting all the eggs in one basket. With a range of potential funding sources smaller amounts can be raised with each the sum often being higher than might be available from a single source.
Alternate sources may include leasing and financing companies, banks and specialist lenders such as stock finance businesses and factoring companies. One disastrous source a small business should avoid at all costs would be to finance the working capital through credit cards where the interest rate could be so high it could cripple the business.