MT Special: 11 ways to watch your cash in a downturn

As business priorities shift from expansion to entrenchment, are you keeping an eye on your cashflow?

Last Updated: 31 Aug 2010

Business priorities have shifted from expansion to entrenchment, so start asking some tough questions about your company's everyday earnings and outgoings. Andrew Saunders and Alastair Dryburgh stiffen your resolve with 11 money-management tips - for the price of 10...

- Put cashflow at the top of your list. In good times, growth was the watchword, but now cash is king and everyone from the CEO down needs to understand this. Putting the cashflow statement rather than the P&L on the first page of the management accounts can help focus minds. As can reminding the boards of listed companies that City analysts will be looking at cash positions in the way they used to look at revenues and profitability. Cashflow is also the new filter through which management decisions must be passed. Ask 'what will this do to our cashflow?' in the same way that you used to ask what the effect on growth or profits was likely to be.

- Collect what's owed to you. Sounds obvious, but it's surprising how much of a difference chasing those overdue invoices can make. Key to getting your bills paid on time is not to leave it solely to the finance department. Work out why bills are unpaid and assign responsibility appropriately. So customers who simply need some duplicate paperwork - or a sharp reminder - to cough up can be handled by the terriers in credit control. But those who have a degree of dissatisfaction with your products or services need the gentler hand of an account manager familiar with the situation to resolve the problem. Happy customers are more likely to pay on time - and to buy from you again.

- Cut costs. This is the textbook response to a downturn and it can work well. But do it systematically. Don't encourage managers to make arbitrary 'I'll sack three people if you sack three' decisions, as they convey to staff and customers that you can't handle the situation. Even the classic call for a '20% reduction in costs from all departments' can be counterproductive. Some areas might stand more without serious upset, but a cut in resources in others could have a calamitous effect. Instead, look at the detail to achieve maximum savings for minimal organisational pain. Have a target, make a plan, tell everyone what you intend to do and why, and then get on with it.

- Negotiate as hard on payment terms as on price. In good times, terms tend to be relegated to the small print, finalised after the main deal is agreed on price, specification and delivery. These days, the terms should be an integral part of any deal - the difference in the real cost of 30 days to pay versus 60 or 90 days can be much greater than a small variation in quoted price. Don't get caught out.

- Keep a close eye on the numbers. Make monthly checks, at least - weekly might be better. Make sure departmental heads have targets for cash-generation and keep them up to the mark. Everyone needs to be banking as much as they can, regularly. But be careful about actually incentivising managers on cash collection - annual targets linked to pay are a very blunt instrument and can cause more problems than they solve.

- Manage your inventory. Do you really need to carry all that stock? Use the 80/20 rule - 80% of revenue is generated by 20% of stock items. How much of the rest can you justify? Be ruthless - wouldn't a choice of 10 widgets priced between 10p and 30p be better for both you and your customers than your current range of 30? Remember that money spent on stock is cash you can't save - or spend on something else.

- Change your billing. Why bill monthly in arrears if you can bill quarterly in advance? For longer projects, try staged billing, because charging an upfront sum with payments three-monthly thereafter effectively lets you get cash in advance of work done. It's exactly what you shouldn't let your debtors get away with! Also, look at offering discounts for direct-debit customers and standing orders, and money off for early payment too - anything that helps get the cash in regularly.

- Outsource. Don't invest in new machinery or extra capacity if you can send the work out instead. Outsourcing may cost a bit more per unit of work done than growing your own, but it will seriously reduce your capital requirements - which is what counts most at the moment. In fact, now would be a good time to get into the outsourcing business if you can; there's likely to be another boom in that sector.

- Take advantage of customers who are softer on cashflow than you. These will get harder to find, but there will still be some - particularly if you run a service business where your clients have 'use it or lose it' budgets. Figure out which clients are most likely to fit the bill and get in touch at the end of a year or a quarter. You may find they are surprisingly willing to spend because they need to use up their allocation for the period. Some may even be happy for you to bill in advance of work done.

- Be careful of bulk discounts in hard times. Buying more than you need to get a lower unit price seems an easy way to save money, but it can be a false economy, especially in a falling market. The market price may drop or you might end up having to almost give it away because tastes have changed or a whizzy new version has come out. And, meanwhile, how much is it costing to store and manage? You could be better off paying a slightly higher unit cost in return for flexible ordering and shorter lead times.

- Lead from the front. If you are the boss, you can create a mythology around the importance of cash management in the company. It worked for Lord Weinstock, who was famous for his impromptu demands for the saving of apparently insignificant sums, or quibbling over the price of a few beers on someone's expenses. Of course, his real motivation was not the specific instance but the general principle that the corporate watchword was thrift. It could work for you, too - make a few calls, bend a few ears and the message will spread like wildfire. Even more so if you publicly sacrifice a few of your costlier perks - could you run a cheaper car, or fly economy rather than business class?

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