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Business recovery: Cash flow management

While there are many reasons why a company will struggle to overcome a crisis, failure is often rooted in a lack of cash.

A swift recovery often boils down to one thing: cash flow. In his latest Seven C’s of Business Recovery, Ireland’s Managing Partner Neil Hughes shares his insight. 

A healthy cash flow is integral to the success of any business, explains Hughes, Managing Partner at Baker Tilly in Ireland.

“Profitability and cash flow are not to be confused.

“Profit can be ‘locked up’ and not readily available to keep a business going while cash, on the other hand, is tangible. Either, there is money in the bank, or there isn’t. Remember, it is a lack of cash that causes most businesses to fail, not a lack of profit. And even the most profitable businesses will fail if they run out of cash.”

“Simply relying on historical models and trends during this troubled period, may not be appropriate. It is imperative for businesses to improve the accuracy of their financial forecasts though robust short-term forecast catered to accommodating changes in key inputs quickly.”

Releasing your lockup

Lockup refers to the latent profit in your business that is tied up in your stock, work-in-progress and debtors.

When a customer has not paid for goods or service, the cash remains in the ‘lockup.’ While the customer is indebted to you, there’s no cash in the bank account to keep the business going.

“During a crisis, releasing the locked-up cash should be a top priority,” says Hughes.

“This falls into the remit of the financial controller who is instrumental in ensuring that there are sufficient reserves of cash to continue trading through a crisis and beyond.

“The lockup must be scrutinised ensuring that cash is not tied up in stock through proper inventory management, goods and services are efficiently delivered and billed, and the company’s cash collection techniques are as rigorous as possible.

“For this to work efficiently, effective practices should be continually adopted throughout the organisation; proper inventory management, completion of work-in-progress, immediate invoicing and rigorous cash collection techniques.”

Keep your cash flow smooth

Cash flow forecasts greatly help business owners track where the money is going to come from and where it is going.

How much cash is in the bank? What access to cash will the business have in the coming periods through bank facilities, and what is the forecasted destination for that cash once it comes in?

Rolling your cash-flow projection forward regularly can help you manage your way through a crisis, explains Hughes.

“Where necessary, seek guidance from your accountant.

“Measures to improve the company’s cash flow must be matched by the principals’ continued resolve to be fully aware of the cash-flow situation.

“Understanding the details of cash control, the forecasts of what money is likely to come in, and what money needs to go out, will allow business owners and managers to trade responsibly, always ensuring that the cash reserves are there to prime the pump of the business.”

The article “Business Recovery: Cash Flow Management” was first published on on 1 October 2020 and has been reproduced with the approval of the author. 

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Neil Hughes

Baker Tilly Ireland

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