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• 07 Jun

  How To Write A Cashflow Improvement Plan

  

  How To Write A Cashflow Improvement Plan

  An Introduction To Cash Flow Planning

  In the world of successful business growth, maintaining a healthy cash flow is paramount to the success and growth of any company. Cash flow is the ease with which money flows through the organisation from its sources of income to the payment of expenses and suppliers.

  If a company is feeling cash pressure each month, it may be time to create a plan to improve the cash flow of the business. This article sets out how to go about that.

  Ideas To Improve Your Position

  For more detailed ideas about the steps to improve the flow of cash through you business please see our free: 

  CASH FLOW GUIDE

  Writing A Cash Flow Improvement Plan

  A well-executed cashflow improvement plan can help businesses navigate through challenging times, seize growth opportunities, and ensure long-term stability. In this article, we will discuss actionable steps to create an effective cash flow improvement plan, including financing options to increase working capital.

  1. Understand Your Current Cash Flow Situation

     The first step in creating a cash flow improvement plan is to assess your current cash flow situation. Gather financial statements, including balance sheets, profit and loss statements, and cash flow statements, to gain a comprehensive understanding of your company's financial health. Identify any cash flow gaps, seasonal fluctuations, or areas of concern that need immediate attention. You may need help from a firm of accountants to do this.

  2. Forecast Cash Flow

     Developing a cash flow forecast allows you to anticipate future inflows and outflows of cash, helping you plan for any potential shortfalls or surpluses. Consider both short-term and long-term forecasts, factoring in different scenarios and variables such as sales projections, payment terms, and anticipated expenses. Once again an accountant may need to help you with this step.

  3. Review and Optimise Receivables Management

     Efficient management of receivables is crucial for cash flow optimisation. Review your current credit terms, credit limits, and collection procedures. Consider implementing strategies such as:
     
     a) Clear Credit Policies: Establish clear credit policies, including credit limits and terms, to ensure timely payments and reduce the risk of bad debts.
     
     b) Invoice Management: Streamline your invoicing process, ensuring invoices are accurate, and timely, and clearly outline payment terms. Consider offering discounts for early payments to encourage prompt settlements.
     
     c) Effective Collection Process: Implement a systematic collection process, including regular follow-ups and reminders for overdue payments. Utilise technology such as automated reminders to enhance efficiency.

  4. Evaluate Payables and Supplier Relationships

     While improving cash flow, it is equally important to maintain strong relationships with suppliers and manage payables effectively. Consider the following strategies:
     
     a) Negotiate Payment Terms: Engage in discussions with suppliers to negotiate favourable payment terms, such as extended payment periods or discounts for early payments. This can help improve cash flow by aligning payment outflows with inflows.
     
     b) Inventory & Stock Management: Optimise stock and inventory levels to avoid excessive carrying costs. Regularly review stock levels, demand patterns, and supplier lead times to ensure efficient inventory management.
     
     c) Supplier Relationships: Cultivate strong relationships with suppliers based on trust and reliability. This can lead to preferential treatment, improved credit terms, and potential cost savings.

  5. Explore Receivables Financing Options

     Receivables financing, also known as invoice financing or factoring, offers businesses a valuable tool to bridge cash flow gaps and access immediate funds. This financing solution involves selling outstanding invoices to a third-party (factor or discounter) at a discount, allowing the business to receive a significant portion of the invoice value upfront. Here are the two common types of receivables financing:
     
     

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     a) Invoice Factoring: In this option, the factor purchases your invoices and assumes responsibility for collecting payment from customers. The factor advances a percentage of the invoice value upfront, typically ranging from 70% to 95%, and pays the remaining balance (minus fees) once the customer pays the invoice.
     
     b) Invoice Discounting: With invoice discounting, the factor lends against the value of your outstanding invoices but does not take over the responsibility of collecting payments. Your business controls the customer relationship and collects payments directly from customers.
     
     Receivables financing provides immediate liquidity, eliminates customer payment wait, and reduces the risk of late or non-payment. It can be a valuable solution for businesses experiencing cash flow constraints or seeking to fund growth initiatives.

  6. Optimise Cash Flow Timing

     Improving the timing of cash flows can have a significant impact on your overall cash flow position. Consider the following strategies:
     
     a) Accounts Payable Management: Negotiate favourable payment terms with suppliers to extend payment due dates without negatively impacting your relationships. This allows you to hold onto cash for a longer period while still meeting your obligations.
     
     b) Accounts Receivable Acceleration: Encourage customers to make payments earlier by offering incentives such as discounts or rewards. Implementing a system that rewards prompt payment can help reduce the average collection period and improve cash flow.
     
     c) Cash Flow Synchronisation: Coordinate your payment cycles with your customers' payment cycles to minimise any cash flow mismatches. This can be achieved through negotiation of contract terms or by adjusting your billing and invoicing cycles.

  7. Monitor and Control Expenses

     Controlling expenses is crucial for maintaining a healthy cash flow. Conduct a comprehensive review of your expenses and identify areas where cost savings can be made. Consider the following measures:
     
     a) Budgeting and Forecasting: Develop a realistic budget and regularly monitor and analyse your actual expenses against it. This allows you to identify any deviations and take appropriate action.
     
     b) Cost Optimisation: Review all expenses, such as rent, utilities, supplies, and discretionary spending, to identify areas where costs can be reduced without compromising the quality of your products or services.
     
     c) Leverage Technology: Adopt technology solutions that streamline processes, automate tasks, and reduce manual errors. This can improve operational efficiency, lower costs, and free up resources for other activities.

  8. Secure Additional Funding Sources

     In some cases, businesses may require additional funding to address cash flow challenges or finance growth initiatives. Exploring alternative funding options can provide the necessary liquidity to support your cash flow improvement plan. Consider options such as:
     
     a) Business Loans: Approach financial institutions to secure short-term or long-term loans based on your business's creditworthiness and borrowing needs. Ensure you have a well-prepared business plan and financial statements to support your loan application.
     
     b) Equity Financing: You may wish to consider raising capital by selling shares of your business to investors. This can provide an injection of funds without incurring debt or interest payments. However, you may have to give away some ownership and control of your business.
     
     c) Government Support Programs: Research and take advantage of government-funded schemes, grants, or subsidies designed to assist businesses in specific sectors or regions. These programs can provide financial support during challenging times or for specific growth initiatives.

  Conclusions About Producing A Plan To Improve Your Cash Flow

  A well-crafted cash flow improvement plan is vital for the financial stability and growth of your business. By understanding your current cash flow situation, forecasting future cash flows, optimising receivables and payables management, exploring receivables financing, optimising cash flow timing, monitoring expenses, and securing additional funding sources when needed, you can take proactive steps to ensure a healthy cash flow.

  Receivables finance, such as invoice factoring and invoice discounting, offers businesses a powerful tool to bridge cash flow gaps and access immediate funds. It provides liquidity, reduces the risk of late or non-payment, and supports your business's financial health.

  Creating and implementing a cash flow improvement plan requires diligence, ongoing monitoring, and flexibility to adapt to changing circumstances. Regularly review and update your plan as your business evolves, and seek professional advice if needed. With a robust cash flow improvement plan in place, your business can navigate through challenges, seize opportunities, and thrive.

  By Glenn Blackman