Typically, cash outflows relate to payments to suppliers (also known as Trade Payables or Trade Creditors), employee wages and salaries, and taxation (employee taxes, sales taxes, and corporate taxes).
Other cash outflows include fixed asset investments or capital expenditure, loan repayments and dividends to shareholders.
In general, we want to slow down cash outflows, always assuming that we are making payments on time and within agreed payment timescales and credit terms. That is the fair and honourable thing to do as we expect our customers to pay us on time and know the impact it can have if payments are delayed.
According to the 2020 QuickBooks State of Payments report, 61% of small business owners do not know how much money they spend each month.
That is a worrying statistic. As the business owner, do you know how much money your company spends each month?
If not, why not? You should! It is your business. If you do not know, how can you impact it, control it, and manage it? Clearly, you cannot if you do not know.
The key difference with cash outflows compared to cash inflows is that you are in control. You can determine whether you are making payment or not, and therefore you can control the timing of cash outflows.
Due to the lack of available funds, most small businesses tend to struggle to make payments on time. According to a recent survey on Forbes, 66% of business owners claim that delays in payment processing causes major issues with cash flow.
So, how do we better manage payments to suppliers?
If you have cash flow issues, call suppliers to discuss the challenges you are facing. Many will be very receptive to helping and deferring for a period or even agreeing to a phased payment plan. Remember that many others who owe the supplier money will ignore and avoid the issue. This puts you at a distinct advantage.
If you make commitments to suppliers, do not break them, particularly if payments are overdue. Do not make commitments that you cannot keep. We suggest that you call and explain that you will try to pay by a certain date depending upon your own cash inflows, and that you will follow up to confirm in advance. This allows you to build trust and develop a relationship with a specific person which can be invaluable going forward.
Open a “number 2 account” and transfer all employee taxes, sales taxes, and a provision for corporate taxes.
Stock/Inventory – understand your higher profit margin items, and analyse past sales and expected sales, and ensure you have enough, but not too much. This needs to be balanced against the time it takes to manufacture or receive from your suppliers. You do not want to lose sales, but at the same time you do not want too much cash tied up in stock that takes many weeks or even months to move. Stock/inventory needs to be reviewed regularly and the business owner must understand the stock cycle. Consider different lead times for different products. Will customers wait to receive their goods? What do your competitors do? You may also be able to have suppliers deliver more frequently and on an almost just-in-time basis.
When negotiating prices and credit terms with suppliers, remember that extended credit terms may be of more benefit to you than a lower price, especially if there are alternative suppliers of the product. This needs to be calculated and a comparison made. In times of cash challenges, we always suggest that you forego profit margin to enhance cash flow. Remember, you can renegotiate later and ask for extended credit terms and reductions in price if your sales merit it, or even in some cases if they do not. The saying “it is a buyer’s market” always holds true.
If you have excess cash, ask for settlement discount for earlier payment. This may be appropriate if the company is forecasting excess cash and can make earlier payment than usual.
Negotiate an annual retrospective discount or loyalty bonus based on trading volumes and expenditure.
Extend payment dates to suppliers by agreement especially if there are multiple alternative suppliers. Use your status as a loyal customer who wants to stay, but needs 60 days rather than 30 days or 90 days rather than 60 days.
Remember that cash outflows are easier to forecast as they are within your control. Despite that, regular review of cash outflows is vital and must be matched against the cash inflows of the company.
This article was first published on Daily Business (https://dailybusinessgroup.co.uk/) on 25 March 2021.