Business Tips: How Business Cashflow Planning can Survive a Recession

Improving Cashflow
For any decision taken in any business cashflow is going to be affected. Whether it concerns sales and marketing; purchases; fixed assets; credit policy or profit margin the cashflow forecast must change. The free Figurewizard Cashflow Calculator and Planner alows you to plan and track those changes, month by month.

The system automatically calculates and forecasts these changes including VAT, overheads; cash collections and payments; fixed asset purchases and sales; letters of credit and the effects on profits and cash of financing by factoring / invoice discounting.

Overheads and Cashflow
Cutting down on overheads will certainly improve outgoings in time but initially there are often costs associated with this such as redundancy, payments in lieu of notice and holiday entitlement. This means that the benefits will take at least several weeks and more likely some months before they begin to appear on your cashflow statement. The overnight sacking of several hundred agency workers by BMW at the Mini plant in the West Midlands in February 2009 is an example of the sort of decision that some companies take in order to shorten this delay. Also it should be noted that cuts in overheads need to start from the top. There should be no exceptions.

Fixed Assets and Cashflow
Cutting back on investing in new fixed assets is easy; you simply decide not to buy any at this time. However fixed asset disposal is unlikely to yield any cashflow benefits as there is little or no market for these in times of recession. In a resession hire purchase or other forms of financing the purchase of fixed assets will only delay their inevitable consequences on your cashflow.
 
Stock and Cashflow
Stock in trade is generally the principal investment of a small of medium sized business. Slow lines will jam much needed cash resources. That is why that at times like these they must be disposed off for whatever sums can be got for them and quickly, while hard decisions must be forced on suppliers to amend minimum order values and lead times to allow you to set new levels as close to ‘just in time’ as is humanly possible: However, as with overheads lower stock levels will take some time to implement and significantly improve your financial position; perhaps as long as a year.

Credit Control and Cashflow
Poor credit control will rapidly undermine any cashflow plan. This is the biggest single cause of cashflow problems and business failure. One safeguard is to insure the debts on your entire sales ledger. Rates for this have soared but this is one overhead that should be disregarded where cuts are concerned. However the insurer only pays if the debt goes bad and that can take a considerable time to resolve, so how well you manage your sales ledger and collect your cash still largely determines the strength or otherwise of your cashflow forecast.

Gross Profit Margin and Cashflow
Revenue is not a term that should simply apply to sales. You should always regard your true revenue as being sales income less payments for goods sold. The difference is what your business actually earns. You must be in a position for payments to suppliers to be the first call on income. Using supplier cash by way of slow payments to finance overheads and expenses will always be seen to be a policy of despair which will only lead to eventual disaster. Hence the importance of early and effective cashflow planning.

Any decisions you take on gross profit margins must affect the future performance and safety of profits and cashflow. Short term measures to eliminate overstocks or slow lines are often the right thing to do but only in the short term. Long term low margins will destroy not just your profit and loss account but your cash resources too.

Improving Profit Margins:
Suppliers should be squeezed to lower their prices at times like these. This is especially important in the case of imported goods. You on the other hand must be ready to look for better prices from your customers or if that is deemed to be impossible, find new suppliers. New products can also help a cashflow plan as long as the margins are high and payments by letter of credit can be avoided, or if not then capable of being fully financed. Factoring or Invoice Discounting is one route to acheiving this. If on the other hand profit margins are allowed to fall, the benefits of lower overheads, a freeze on fixed assets, more efficient stock management and tighter credit control will come to nothing; so be ruthless. In the long term maintaining an adequate gross profit margin is the key to ensuring that your survival plan delivers throughout a prolonged recession.

click here to view the new (free) cashflow calculator and planner

6th March 2009

© Figurewizard.com ltd. This article may not be reproduced without our express permission


Your Comments

Great article. Simple but effective. Our cashflow planning means having to take hard decisions that some people here don't like and don't want to understand so I have printed this and distributed it to them!
Comment by gradgrind
I like the cashflow calculator a lot. My accountant doesn't for the obvious reason!
Comment by CCranfield
Thanks for this. I now have a cashflow forecast that makes sense without having to pay hundreds of pounds for it. The ability to go back and plan cashflow expenditure is especially useful.
Comment by dan bennet
Where the figurewizard Cashflow Calculator scores is that its cashflow forecasts can be amended at will until they are right. Cashflow planning is therefore at your fingertips. That is what makes it unique. Remember that if you register (that's free too) you can retrieve your cashflow forecasts and re calculate the cash you plan to spend or the cash you expect to receive as often as you need to.
Comment by Figurewizard
Why do vat payments go through every month on the cashflow report? I thought that vat was paid every three months.
Comment by w. court
Do you import goods or services from outside the EC?
Comment by Figurewizard
we will be importing about half of our goods from china
Comment by w.court
When directly importing goods from outside the EC VAT is payable on entry. However it is more usual for this VAT charge to be deferred for one month as long as you apply to HMRC to do so; especially if non EC imports are a regular feature of your business. Because you put a percentage for imports from outside the EC when you entered your figures in step 1 the cashflow calculator separates this figure from the total for goods purchased. The VAT on these imports is then payable one month after their arrival at the UK port (i.e. deferral). This is why VAT remittances show monthly on your cashflow forecast. Note however that VAT is never payable when importing goods from a supplier within the EC, even if they originally purchased them from outside. The rules state that as they would have paid their own country's version of VAT when they did - So it cannot be charged for again.
Comment by Figurewizard
when the cashflow calculator works out the value and vat on imports does it take into account the import duty and freight?
Comment by EJ
Yes the system does calculate VAT correctly. When you allocate the percentages of sales for imports the total cost of goods sold plus stock for these are calculated. The system then breaks then down into EC and non-EC. As with a previous post direct non-EC imports are subject to VAT which is usually payable one month after arrival at the UK port. There is no VAT charge for goods imported directly from any EC country.
Comment by Figurewizard
Why are letters of credit charged to the cashflow as soon as they are raised even though it may take a month or more for the goods to arrive?
Comment by John Coulston
@John Coulston

Whenever a bank issues a letter of credit (L/C) on behalf of a client it is entering into an irrevocable undertaking with the other party's bank that it will remit its value simply on receipt of the documents to which the transaction refers. That is why the value of the L/C is always deducted from the client's funds, (or added to the overdraft) at the time that it is raised. Incidentally this is also why your sale price for any goods you supply which have been purchased by L/C should always reflect a strong gross profit margin because of the initial adverse cashflow effects this involves. This in turn will ensure that in time the trade will become self financing.
Comment by Figurewizard

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