Whitepaper Cash-Flow

1. SageInsight: Cash flow
The lifeblood of the organisation.
Cash

2. Introduction
Profitability may be the goal of every
business, but its survival depends
entirely on remaining solvent.
Solvency is the ability to pay debts
as they become due. Many profitable
businesses have failed because they
did not arrange the funding they
needed in advance and simply ran out
of cash.
A successful organisation is not just
profitable, but manages its cash flow
effectively. Cash flow refers to the
day-to-day net movement of funds
into and out of the business. The
difference at the end of each day
increases either its bank balance or its
overdraft.
The problem is that multiple systems
with different sources of data leave
finance departments sitting on
mountains of data that is hard to
extract and use. This makes it difficult
to accurately assess the current cash
position and to forecast future funding
requirements.
Good cash management requires
organisations to streamline and
automate their operational cash
processes and forecast their future
cash requirements accurately. This will
allow them to:
• minimise costs by shortening the
cycle from sales order to receiving
payment from customers
• obtain funding at the lowest
possible cost
• minimise late payment fees
• maximise early payment discounts.
Specific areas that must be
addressed by most organisations
include:
• reducing inventory levels to release
cash
• lowering the average age of
debtors
• minimising bad debts written off
• efficiently funding operations to
reduce interest payments
• reducing costs to reduce cash
flowing out of the business
• increasing accuracy of cash flow
forecasts
Cash flow forecasting is essential
for foreseeing peaks and troughs in
financing requirements. This forecast
helps the organisation to remain
solvent by arranging funding well in
advance of peaks, and to select the
most suitable solution to keep interest
and financing costs to a minimum.
Key questions
• Are your cash inflows complex
and/or volatile?
• Are your cash outflows complex
and/or volatile?
• Are your cash flow forecasts
accurate?
• Do they reveal your additional
funding requirements well in
advance?
• Is your spreadsheet forecasting
system time consuming to
operate?
Sage Insight
Cash flow

3. How it works
Overtrading
Overtrading occurs when
organisations hit good times and
build up a strong order book. Without
looking at the cash flow impact of
this sudden expansion, they do not
anticipate the need to pay for large
amounts of additional raw materials
and components, to pay more staff
to complete the orders and to buy
new plant and machinery to make
the goods ordered. These additional
costs must all be paid before
customers pay for their new orders.
Organisations that run short of money
typically delay payment to suppliers,
who may stop supplying material
and services needed to complete
orders. If there is no money to meet
payrolls, organisations try to raise
their overdraft limit, but bankers
are unimpressed by poor cash
management and are reluctant to
increase their risk. On the contrary,
they look to reduce it by calling in the
overdraft and selling the business or
its assets.
An effective cash flow forecast will
reveal the initial negative impact
of new orders, projects, product
launches, entering new markets and
so on so the organisation can put
in place additional funding to cover
the extra needs that arise before
money starts flowing in from the new
business.
Flows
Cash flows into the business from a
variety of sources, which include:
• profitable trading
• VAT received
• loans raised
• shares issued
• sale of fixed assets
• grants received
• tax refunds
Cash flow forecasts
These are often derived from profit
and loss account forecasts (see
separate Sage Insight whitepaper), by
taking into account the timing lags.
These include:
• the time that passes between a
sale and clearance by the bank
of the associated cheque from
customer
• the period of credit taken before
paying suppliers
• payment of rent and other charges
in advance
• meeting weekly and monthly
payrolls
Cash includes current accounts,
short-term deposits, bank overdrafts
and short-term loans. Forecasts
also take account of non-trading
transactions listed above.
The cash flow forecast will show
how much of its overdraft facility the
organisation will need to use and for
what period it will be required and will
highlight any additional short-term
financing requirements.
Advance warning allows the business
to reduce the impact of negative
cash flows before they start causing
problems. It also shows positive
balances that will become available
for short-term or long-term investment
or for paying dividends.
Forecasting period
Banks balance their customers’
accounts at the end of each day,
so organisations must balance the
additional burden of short forecasting
periods, such as daily, with the risk of
an unexpected peak occurring in the
middle of a period, such as a month.
An effective automated system allows
a sensible balance to be struck.
Funding
Funding to be linked to the timing of
the outflow. Bank overdrafts are best
where flows are volatile and short
term in nature, such as monthly or
seasonal trading cycles, new product
launches or special promotions. In
contrast, loans and leases are more
cost effective for purchasing assets.
General growth can be funded by
invoice factoring or discounting and
major projects may need new equity.
Sage Insight
Cash flow

4. Automation
Efficient cash flow management
requires automation of cash handling
in accounts receivable and accounts
payable departments. It covers areas
like direct debits and standing orders,
bank reconciliations, foreign currency
processing, electronic payments and
electronic banking.
The system should also automate
production of reports on cash
management, such as aged
debtors analysis, and calculate key
performance indicators, such as
debtor days outstanding and average
time to pay suppliers’ invoices. There
should also be clear easy-to-use
reporting and enquiry capabilities to
generate any additional cash reports
the business needs.
Automation not only saves valuable
labour and time, but it also avoids
human errors that arise from keying
in data from computer-produced
paper documents. Better quality
information also helps with customer
and supplier relationships.
Paying suppliers
A business should avoid the
temptation to delay payment in
order to improve its short-term
cash position. Paying suppliers
promptly establishes a good
business relationship and ensures
the continued supply of goods and
services the company needs to fulfill
its contracts with customers. Any
interruption to supplies could lead to
late deliveries to customers and loss
of business.
Similarly, clumsy manual cash
processing procedures, either
internally between departments, or
externally with suppliers, partners
and banks, could result in delays or
incorrect/missed payments, risking
damage to relationships.
Problems to watch
Cash flow problems can arise unexpectedly for
a number of other reasons, such as:
• suppliers tightening up their credit
terms
• customers becoming insolvent
• a successful marketing promotion
that suddenly increases sales on
credit
• not borrowing enough
• poor credit control
• not forecasting ahead
• borrowing sources not matching
their purpose, such as buying
major assets with an overdraft
Inventory reduction
Cash flow and balance sheet forecasts show
managers clearly the cost of bulging stock-
rooms and warehouses. It encourages them
to release funds by keeping stock levels to
a minimum, through more accurate demand
forecasting. It also forms the basis for closer
relationships with suppliers and encourages
them to shorten the time taken to fulfil orders.
Sage Insight
Cash flow

5. Sage Insight
Cash flow

6. Sage Insight
Cash flow

7. Tips
• Compare your average debtor days
with others in your industry. Set
targets for reduction
• The payment process doesn’t start
until the invoice has been issued,
so there should be no excuse
for not sending out the invoice
on the same day that goods are
dispatched or services delivered.
Send invoices electronically,
wherever possible.
• Offer customers a special discount
to encourage them to place orders
they are currently considering in
an accelerated time-frame. Offer a
small discount for early payment of
invoices.
• Do not be afraid that chasing
cash will upset the customer. Be
polite and professional and avoid
emotion.
• Avoid doing business with slow
paying or non-paying customers
from the start. Maintain a ‘stop list’
of customers you do not want to
give more credit to, keep it up to
date and circulate it to appropriate
employees, to prevent further credit
being given.
• Do not hesitate to turn down an
order that might put too much
pressure on the business’s
borrowings.
• Ensure the specification for
every order is clear, to avoid later
disputes. Sort out any problems
with an order before it becomes
a disputed invoice. Avoid sloppy
transaction processing, as
disputes or part deliveries will delay
payment.
• While creditors can be paid 30
days later for goods supplied,
people have to be paid at the end
of each week or month they work.
For services that have a large
labour element, such as temporary
contract staff, ask for payment in
seven, not 30 days.
• Ask for deposits for large orders, to
fund purchase of materials. Seek
advance and stage payments for
any major work or bill weekly and
ask for payment in seven days.
Bottom line
Streamlining cash handling processes
will save the organisation money
and give it a good overall view of its
current cash situation. Accurately
forecasting cash flows well in advance
will ensure that it stays solvent and
uses the most appropriate type of
funding at the lowest possible cost
interest and fees.
Effective cash management is an
organisation-wide effort involving
many departments. It is an essential
part of running a business and should
be considered a daily activity. Cash
has to be forecast, chased, reported
and monitored in a disciplined and
regular manner.
If this is done properly, the
organisation will be able to
quickly, effectively and efficiently
accommodate changes in operational
requirements, which could require
short-term cash or long-term
investment. This will be a source of
significant competitive advantage in
the marketplace.
Links, references and useful
resources
‘Department for Business,
Innovation and Skills,
publications on managing
cashflow’
‘Pay on Time’, the Complete
Guide to the Late Payment of
Commercial Debts (Interest) Act
1998. The government recognises
that late payment is a problem and
encourages customers to pay on
time by giving suppliers the right to
claim interest if they pay late.
‘The Institute of Credit
Management’, the professional
body representing the interests
of people in all sectors of credit
management.
‘The Finance & Leasing
Association’, the UK’s leading trade
association for the consumer credit,
motor finance and asset finance
sectors.
‘The Asset Based Finance
Association’, a UK based trade
association whose members provide
factoring, invoice discounting and
asset based lending.
‘Registry Trust’, a not-for-profit
company which operates the
Register of Judgments, Orders and
Fines for England and Wales on
behalf of the Ministry of Justice, as
well as similar registers for Scotland,
Republic of Ireland, Northern Ireland,
the Isle of Man and Jersey.
Sage Insight
Cash flow

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Telephone: 0845 111 99 88
Email: customer.development@sage.com
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© Sage (UK) Limited 2014
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