10 tips for managing your cash flow

Cash flow problems cause more businesses to fail than anything else, which is a sobering thought when you consider the sorts of challenges that IT channel companies currently face. Here are 10 key tips for keeping on top of cash flow.

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10 tips for managing your cash flow
By  Andrew Seymour Published  August 4, 2010

It’s said that cash flow problems cause more businesses to fail than anything else, which is a sobering thought when you consider the sorts of challenges that IT channel companies are facing to get their money in the current climate.

Guy Whitcroft, principal consultant at CapitalSteps and an expert on regional channel issues, ran a cash flow management workshop at the Digital Consumer Channel event in the UAE earlier this year. Here are his top 10 tips for keeping on top of cash flow.

10. Accurate forecasting holds the key

Quite simply, cash flow forecasting remains the single most important business intelligence tool for any channel company as it forms the platform on which all other decisions are made. Analyse the payment history of your customers and factor that into your forecasting. Look at which customers are regular payers, which ones are slow players and which ones will accelerate payments based on incentives. “Never be optimistic on a cash flow forecast because that way you are going to make promises about payments [that you owe to your suppliers],” advises Guy Whitcroft. “It could be embarrassing if you miss a payment to a supplier or ask for a discount to pay upfront and then find you don’t have the cash to do it because your cash forecast was so wrong. Make sure your cash flow forecast is accurate. That way you predict where the problems are and you can be proactive by trying to get cash in early.”

9. Know your sales cycles

Understanding how product sales cycles work can mean the difference between staying afloat and getting dragged under. Evaluate sales data on a weekly basis – not monthly – and pay attention to shipping cycles. If you are a distributor then establish the duration between placing an order and getting the stocks into your warehouse – and then build that into your forecast. “What a lot of people do is get lazy,” says Whitcroft. “They take averages and build buffers onto each average, and it is the buffers that often kill you. You end up with far too much inventory because you have built in a week’s buffer on the order cycle, a week’s buffer on the shipping cycle and a week’s buffer on the clearance cycle. That can cost you dearly because if you then try and dump excess inventory in a hurry it becomes expensive.”

8. Keep tabs on market dynamics

Good price management is all about market intelligence. You need to know what your competition is doing and what deals are going on in the market because customers will negotiate. That is not to say you always have to be the cheapest though. Sometimes there is a good reason for a particular deal taking place, such as a company clearing excess inventory in a hurry to bring in cash. “At that point you have to make a rational decision as to whether you want to match the deal or let them take the deal and the hit, waiting until you have the inventory a week later when they will probably have run out at the normal price,’ says Whitcroft. “Those are things you need to understand and they are all down to market intelligence. There is no substitute for having your people in contact with the street and understanding what’s going on.”

7. Understand where delays can occur

Delays in the business cycle are inevitable. You get delays in the order cycle if the customer demand is there but your supplier hasn’t got stock or a shipment is re-routed unexpectedly. You get delays in sales because you don’t have the stock to sell to customers. And until you have made the sales you can’t get the cash in so you get a delay in collections. All of these factors impact cash flow, but that doesn’t mean they should be used as an excuse. “You need to understand those factors and where the delays can occur, and you need to have contingency plans for them,” argues Whitcroft. “Unfortunately a lot of people are very reactive and only tend to look at short-term fixes. But in reality you need to be proactive within your business plan and cater for different scenarios.”

6. Build bridges with your vendors

Vendors naturally want you to sell as much of their product as possible, but it is also in their interests that you are profitable. Have a relationship with them that is open and honest so that they understand the issues you face in your market. “Their first loyalty is to their own bottom line, but their bottom line will be severely impacted if you are not making a profit because you are not going to be able to pay and you are not going to enjoy the business,” says Whitcroft. “If you can develop a strong multi-level relationship where you understand their business processes, order cycles and product lifecycles — and you foster a strong working relationship at all levels of your organisation with all levels of their organisation — you are going to maximise the opportunities and minimise the problems.”

2623 days ago
Mukul Shyam

Well written ! Cash flow is King !

2624 days ago
CEO

Right on. Mr. Whitcroft nailed it couldn't agree more. Brilliant article and great tips. Very impressive indeed.

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