While profit and turnover are important measures of firm operation but the main focus must shift to cash when times are as difficult as they are at the start of 2011 and many businesses are seeing themselves in difficulties.
The most most immediate indicator of the way a firm is performing is cash flow and it can also furnish a warning signal that action needs to be taken to prevent a slide into insolvency.
Retained Profits
Close attention to cash flow should give a clearer photograph of the immediate state of the firm but while it may be inherent to adjust to advance incomings against outgoings this is only going to be a retention operation.
The firm must also look at its firm plan and firm model, preferably with the help of a turnaround adviser. An objective outsider working as part of the firm team to gain its medium and longer term time to come may identify basic weaknesses that undermine the quality to operate cash flow.
The first step in managing cash is to invent a 13-week cash flow forecast to help identify risks and actions that can be taken to reduce them. It should contain income from sales and other receipts and outgoings, both to ongoing obligations such as rent wages and finance and to creditors.
The firm also needs to operate cash on a daily basis, with payments made on a priority basis with purchases approved by an authorised man who is aware of their impact on cash flow. This will avoid the risk of returned cheques. It is also advisable for a firm to talk to the bank and keep it aware of what is being done to keep things under control.
If the forecast is showing that there is a mismatch in the timing of money coming in and fixed amounts that have to be paid out (such as leases for structure and equipment, wages and supplies) the cash flow forecast will show where the problems are and recommend what needs to be tackled and the order in which to do so.
For example, a firm may have long-standing customers who are themselves facing difficulties and for the sake of retaining their firm may have been allowed extra time to pay invoices. action is needed, however, if this is beginning to push the firm towards insolvency. It may be that an arrangement can be made with the customers to pay excellent invoices in small amounts over an agreed period, which will keep at least some cash coming in and support the relationship with the customer.
In the same way, the firm must conduct payments against receipts by prioritising them and paying out of cash received in order of priority. Priority payments will be needed to keep the firm going such as purchasing materials where suppliers are often on stop.
The intensity level of cash management will depend on how severe the cash flow situation is. Steps should be taken to heighten cash flow by seeing at prices, staffing, overheads and all other costs to consider either there are cost savings that can be made. Does the firm as a matter of fact need three fork lift trucks or can it conduct with two or even one, for example. Is it inherent to renegotiate payments and prices with suppliers or reduce the quantity of supplies ordered? It is in their interests to negotiate since they too will want to survive and support business. It may be that they will accept a rearrangement of, say, regular payments to monthly payments to keep things under control.
Similarly, are all the staff fully occupied? If not, and they are indispensable habitancy the firm does not want to lose, it may be worth cutting overtime or negotiating reduced hours or reduced wages. If habitancy feel included in the decision development and are all working together to help the firm survive agreements can be reached that will help the cash flow situation in the immediate time to come while also protecting the longer term future.
Tight operate of cash coupled with a approved look at the firm model and a realistic firm plan will go a long way to help a firm survive in difficult trading conditions.
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