Hi
Let's start by looking at a vital area of every business ....cash, below are some ideas on ways to tighten up cash collection and what to look at to determine your current and future cash position.
1) Ensure credit checks are carried out on all new customers and that the results of those checks are acted upon, it is not good enough just to do the check and then not act on the outcome. In addition you might want to keep an eye on existing customers for adverse movements in their credit ratings, credit reporting companies will track specified businesses and update you on movements in credit ratings (there is a cost for this service, but that needs to be considered alongside the cost of a bad debt).
2)Have a robust but fair debt collection policy, this should ensure that customers know exactly when to pay and your credit control team know exactly what to do and when. Ensure debtor lists are reviewed regularly by an appropriate member of staff.
3)Look for warning signs in the management accounts that the cash position is deteriorating, the current ratio and acid test ratio should be monitored and adverse trends should be investigated.
Current ratio = Current assets / Current Liabilities
Acid test ratio = Current assets - Stock / Current Liabilities
4)Regularly monitor your cash flow forecast, it could provide advance warning of a problem, giving you opportunity to take corrective action to stop or reduce the effects of the problem. To have any meaning the cash flow forecast needs to be regularly updated to take in to account changes in the cash flows in and out of the business.
5)Do not assume that just because the business is doing well there is no need to bother with cash forecasts, many businesses have cash problems at periods of growth and these periods need as much attention and planning as do quieter trading periods .
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