Cash is king – how cashflow can optimise your business

A combination of higher interest rates, persistent cost increases and geopolitical uncertainty all contribute to the challenging environment businesses find themselves in.

In such conditions, cash takes on a whole new meaning and the term ‘cash is king’ really comes into play. Having healthy cash resources and a positive working capital cycle is fundamental to ensuring the financial viability of your business.

Here, we discuss eight ways to optimise your cashflow to ensure that your business has sufficient cash reserves to endure this challenging economy.

Before we discuss ways to improve cashflow, it is imperative to make sure that you understand your cash position, both now and into the future.

You should prepare both short-term (13 week) and longer-term models to enable your business to anticipate future cashflow movements and cash positions at different points in time.

Short-term cashflow modelling highlights inter-month crunch points, taking into account the timings of payments to non-trade creditors, such as PAYE and VAT. Longer term cashflow allows you to identify any potential shortfalls over the next year so you can take steps to proactively address these accordingly. To make this as effective as possible, models should be clear and easy to understand, simple to update, realistic and integrated to your balance sheet and profit and loss account.

It's also recommended to stress test your model, to understand the impact if certain scenarios were to occur (for example, a significant change in turnover, increases in raw material costs or the loss of a key customer). This ensures that you have leeway within your business model and that there are no surprises.

It is of key importance to understand your working capital cycle - i.e. how long it takes you to turn the goods or services you supply into cash, compared to the length of time you have to pay your suppliers.

Businesses will often find a gap between when they have to pay their suppliers and when they receive payment from their customers. It’s crucial to closely monitor this, particularly if you are a growing business, to ensure that you don’t inadvertently grow too fast and run out of money.

There are a range of financing options which can support your working capital cycle, for example, stock finance, debtor financing and construction financing. Where you utilise these financing options, you should ensure that the terms match your working capital cycle and don’t leave you with unexpected cash flow shortfalls.

One way to shorten your working capital cycle is to ensure you invoice promptly and collect your debts.

Whilst this sounds obvious, it is often the case that invoicing delays and a lack of focus on debt collection can result in cash being trapped on your balance sheet unnecessarily.

Think about negotiating shorter payment terms with your customers, for example monthly invoicing on longer term projects or up-front deposits. Also make sure you enforce the payment terms you have in place with your customers.

Automating your credit control function, can help reduce the administrative burden of chasing overdue debts, supporting your cashflow and reducing the risk of default.

On the flip side, it is also important to take advantage of the full payment terms offered by your suppliers. Strong relationships should be built with your vendors to enable opportunities for negotiation of favourable payment terms, ideally where payment days either match or exceed your working capital cycle.

Streamlining suppliers can also help reduce your costs. The benefits can be twofold, in that it opens opportunities to take advantage of potential volume discounting, as well as reducing the administrative costs and time associated with supplier management and invoice processing.

There should be robust controls in place to control your costs and discretionary spend. Without controls, your business risks making poor cost decisions that result in overspend and other unnecessary expense, which are detrimental to not just cashflow but the whole business.

It should be an ongoing consideration whether there is any scope for cost-saving opportunities, for example, subletting extra warehousing space, reducing costly marketing or entertaining expenses, or limiting credit card spend. Each cost may be small individually, but they can add up and have a major impact on cashflow.

Of course, whatever you do should not reduce the quality of your business’s output.

When looking at your assets, ask if they are generating cash to the best of their ability - could they be working harder to deliver more cash into the business?

This may just involve changing the way the asset is used to increase the output of your existing offerings, such as subletting extra office or warehousing space (as discussed earlier),

It is also possible that current assets could be utilised differently to expand your product or service offering. By doing so, you’re diversifying revenue streams and reaching additional markets, increasing cash into the business and boosting the robustness of your business model for future revenue.

Where assets are no longer in use or failing to deliver sufficient cash inflows, these could be disposed of. Once determined, this should be done sooner rather than later to avoid additional depreciation in value and provide a cash injection into the business, which can put to good use.

VAT is often overlooked as a tool for maximising cash. However, there are a few things that every business should consider:

Monthly VAT returns

Businesses which are net VAT reclaimers could opt for monthly VAT returns. The additional administrative burden from monthly returns may be offset by quicker receipt of VAT on expenses.

Input tax accruals

Where month-end invoices are received but not entered into the system, you can accrue for the input tax and add to your VAT return, giving you a one-month cash injection.

Claim bad debt relief on unpaid invoices

You can reclaim VAT paid on invoices which remain unpaid 6 months after the later of the payment due date and the date the goods/services were supplied. This is an area often overlooked by business.

Claim back VAT on expenses

VAT is often underclaimed by having poor expense management systems or not insisting on VAT receipts for expenses.

Ensure correct rate is applied

Make sure you are accounting for the correct rate of VAT on your products supplied. This is particularly important for B2C businesses, where the price charged for products doesn’t typically change, and therefore a reduction in VAT rate can be a direct benefit. You have four years to go back and make claims if you have applied the wrong VAT rates.

Lastly, but by no means least, it is important to note that optimising the cashflow of your business sits with the whole team, not just the finance team.

Dependent upon the size of your business, it is likely that aspects of operations fundamental to an optimal cashflow fall under the remit of other teams. For example, your sales team will negotiate payment terms with customers, whilst the supply chain team manage stock levels and payment terms agreed with suppliers.

Consequently, cash should be made a priority across the business to ensure a strong cash is king culture. All relevant employees should understand how their everyday tasks can impact upon cashflow and the parameters within which they can operate.

These are some of the strategies that businesses can employ to ensure they are maximising their cash positions. At Evelyn Partners, we have a team dedicated to working alongside business of all sizes to assist them in optimising their cashflow using tailor-made solutions.

Reach out to see how we can assist you to ensure your business has the working capital to withstand the current challenging economic environment.