Cash

SME’s and Cash flows

richardter47 Business help, Cash, Finance , , , , ,

It’s tough being a SME especially when it comes to cash. Banks are restricting their lending especially to SME’s and when they do lend charge interest rates well above that extended to the large corporates. The average interest rates for loans less than £1 Million are double that for loans above £20 Million (N Blake Economic Advisor Ernst & Young).

Corporates further put pressure on their SME suppliers by paying suppliers on average 34 days after term dates (range 30 to 90 days). In the UK late payment is endemic despite an EU directive for all companies to pay within 30 days and a public sector commitment to pay invoices within 10 days. Ask any SME owner dealing with Government (Inst. of Credit Management).

Yet the SME sector is significant as proven by some statistics:

  • SME’s comprise 59.1% of private sector employment
  • 48.6% of private sector turnover
  • Turnover in the SME sector is £3.2 Trillion!
  • They employ 22.5 Million people

(Dept. for Business Innovation & Skills)

Yet their experience of the economic climate is vastly different then for the corporates. The increasing delay in both international and domestic payments (British Chamber of Commerce Quarterly Economic Survey) combined with the lack of access to funding is playing havoc with cash flows.

So what can be done? Many strategies can be adopted but one which is neglected in that 90% of invoices are still submitted on paper is e-invoicing. Aside from cost savings it will ensure early arrival at customers. The use of direct debit systems is increasingly being adopted with SME‘s lagging as perceived to be difficult to set up. Using DD will be especially useful to SME’s selling B2B. A scheme which uses this is the SEPA B2B Scheme and is used for lending decisions as well as it ties in well with the increasingly tightly integrated physical supply chains.

Enlightened corporates such as Tesco, B&Q and M&S have introduced supply chain finance to ensure that not only suppliers are paid more quickly but also enables these suppliers to borrow at a lower rate of interest. The key to this model is the visibility of the supply chain finance which enables banks to make decisions on real-time information as opposed to the traditional historic based balance sheet lending. This model will work less well when the customer base is themselves SME’s.

Relying on paper based invoices and traditional accounting processes leaves the SME with little bargaining power. By adopting both sales and supplier invoice e-invoicing with direct debit payments mechanism this will ensure terms are adhered too and payment will be sooner and being visible and transparent to banks easier to fund at better rates.

With the economic outlook remaining poor SME’s will need to look at alternatives to managing cash flow from the traditional methods.

(Additional sources AIA July/August 2012)

Top tips for better working capital management

richardter47 Business help, Cash, Finance

Top tips for better working capital management

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Posted by Hugh Williams in In practice, In business on Mon, 06/12/2010 – 14:44

 

Cash is the number one priority for businesses and yet many CFOs are afraid of leading the charge when it comes to working capital management initiatives. Hugh Williams explains why it’s time for CFOs to get their hands dirty.

A lot of firms are currently undertaking some initiative to better manage their working capital because they cannot fund their businesses in the same way as they did in the past. Credit is either too difficult to get or much more expensive than before. Most have taken short term measures to stem the flow of cash (paying suppliers more slowly, getting money in faster from customers, and indeed cutting jobs) but these measures are running out of steam and are bad for long-term business relationships and for the wider economy.

Successfully managing working capital requires an executive sponsor who can mediate across a range of operational and financial functions, and it’s the CFO who has the best chance to lead this effort and make it work. Unfortunately for many of them, this falls outside their comfort zone, since it requires complex planning skills, and as a result many businesses are missing a huge opportunity to improve their profits.

The low-hanging fruit
Most working capital management initiatives nowadays focus on finance wanting to get its hands on the cash tied up in finished goods stock and anywhere else that they have significant inventories – and who can blame them? However, CFOs need to bear in mind that excess stock is just a symptom of poor internal policies, silo-based behaviour, cross-functional mistrust, and blind risk-taking. So getting out the big scissors to cut stock will not stop it from coming back, yet it will unwittingly create significant supply chain problems for the business which will far outweigh the temporary savings that have just been made.

In some cases there are massive shortages of supply (and lost sales) because businesses have cut people (for people, read capacity); poor customer service and product availability because stocks have been cut blindly; and badly controlled new product introduction (lost sales, obsolete stocks) because demand and supply chain planning is poor.

Conflicting KPIs are the greatest enemy of successful integrated business planning (IBP). In most companies management gives each departmental silo in the business a target to achieve that it is hoped will drive the business towards its goal.

Dr Eli Goldratt, author of The Goal, once said, “The sum of the local optimums does not equal the global optimum”. There are examples almost everywhere where businesses still think this is the way to manage and it usually doesn’t work. “A fair day’s work for a fair day’s pay,” they argue. Yes, but only to produce something the customer wants today, not at some point in the future. That’s why we have so much stock!

Finding the high-hanging fruit
If CFOs want better working capital management, they must step forward to lead end-to-end supply chain management, and not just issue unrealistic dictates – or worse still, wait to count the cost. They must understand, embrace and drive forward IBP and really get involved in the value or supply chain rather than marginalising this as some kind of ‘trucks’ and ‘sheds’ logistics planning to delegate downstream.

Today, IBP depends on purging the silo mentality and removing departmental KPIs that are local optimums. Sales and operations, for example, work at cross-purposes in too many companies and become adversaries – this needs to stop. These should be replaced by performance measures and drivers that make everyone work together towards the same end. These measures will beat a path to what I call ‘the high hanging fruit’. We all know the fruit at the top is the best and juiciest, but it also the hardest to get to.

Executive sponsorship is essential. CFOs, supported by their CEOs, must lead the culture change that accompanies integrated planning efforts visibly, vocally and physically. They cannot afford to pay lip service to this, otherwise they will rank alongside those many companies who have tried and failed because top management was not fully engaged. It is a long road that will take patience and persistence and continued investment, probably over a few years. In the first 12 months, you can just about get the process up and running. But those who have done this successfully will tell you they had not realised the potential size of the prize until they got to the top of the tree. The fruit up there is indeed much juicier than the stuff down low that everyone else is picking.

Hugh Williams is the managing director of UK-based Hughenden Consulting and has 25 years experience advising global companies like BP and Baxi on managing working capital.

 

Cash flow is the lifeblood of all businesses

richardter47 Business help, Cash, Finance, Forecasting

Cash flow is the lifeblood of all businesses and accordingly this must enjoy a first priority in any management team. The basic cash flow rules are;

  1. Always ensure there is cash

Running out of cash will result in business failure. If the business does not generate enough cash then borrow if possible. Note your cash flow projections must include repaying any loan taken.

  1. Cash Is King.

Manage it as it is very unforgiving if you do not. It keeps the business alive.

  1. 3. Know Your Cash Balance.

Always know your cash balance and most importantly it is not the balance what is shown on your bank statement. Even the most experienced person will fail if they are making business decisions using inaccurate or incomplete cash balances.

  1. 4. The bank balance is not the cash

The true cash balance is that which is in your books. Bank and cash balance are two different things. They are rarely the same.

  1. 5. If not you get someone else

A true cash balance can only be obtained by keeping your cash book right up to date. If you cannot do it or have the time get someone else. Remember know your cash balance.

  1. 6. Cash forecasting

Financial people  use a 13 week rolling cash forecast. Even with the cash difficult to predict,t it is amazing how a 13 week forecast identifies pinch points. This is a start of managing your business and not being managed by it.

  1. 7. Have cash flow projections and planning

Plan your weekly and monthly cash flow in and outs. Weekly planning allows you to talk to suppliers helping you over pinch points.

  1. 8. Cash flow problems do not just happen

Many SME owners are surprised when hitting a cash flow problem because they failed to anticipate and plan to deal with it. Always do your projections working from up to date and accurate data. The surprise will then be how relitavely easily it was to get through the pinch point.

  1. 9. Use expertise

Not all SME owners are comfortable with figures or have the time. Bookkeepers often are well capable but get real expertise to help or oversee. Wrong information will lead to wrong decisions.

Once managing your cash flow you can concentrate on your customers who are the cash generators in the business. Focus your talents on them and through cash management reduce the worries cash flow may give.

Should you want or need more help in cash flow planning and/or forecasting then call;

Richard Terhorst at 08450095360 or E-Mail at Richard@rhtbusiness.com