Page 4: Managing cash flow
Managing cash flow is vital both to the survival of a business and to its long-term well-being. CIMA-qualified management accountants often hold key positions in organisations, such as Finance Director or Financial Manager. Their thorough knowledge of the industry in which the business operates allows them to forecast, monitor and control cash flows using key indicators for that business, such as sales trends. For example, Tesco would expect to sell more just before Christmas and in the January sales. A carpet manufacturer might look how many new houses were being built in the area, whilst an organic farmer could look at how consumer tastes and needs are changing.
Often cash inflows lag behind outflows, so a business may need to borrow or use cash from a previous period to cover the shortfall. For example, a farmer who sells potatoes to Tesco will want paying as soon as the sale takes place. However, Tesco does not receive the cash for these potatoes until they arrive and have been sold in its stores.
Improving cash flow
A business can look for imaginative ways to improve cash flow or manage credit:
- Making better use of assets empty warehouse space or unused transport could be hired to other businesses.
- Making sure as little interest as possible is being paid on borrowing pay debts early if possible and consolidate debts into one long term, low interest rate package.
- Negotiate payment dates with suppliers, perhaps paying later, or in installments.
- Avoid offering discounts for early payment (an effective but expensive way to get more cash in sooner).
If a business is profitable, this should mean a little more cash comes in each time the cash flow cycle turns. This can then be used to cover those periods where there is a shortfall. Careful management by a trained management accountant will ensure that the business is aware of possible future shortfalls so that it has these planned into its business strategy. This will mean that there is always enough cash to pay creditors.