Five ways to help your business stay cash flow positive

Many business owners only start to consider cash and cost management once headroom tightens or disappears – typically resulting in those businesses struggling to adequately manage their cash flow. 

This is a common theme in Bermuda, where difficult trading conditions and increased competition has resulted in businesses experiencing declining revenues. 

In addition, a relatively high, fixed cost base has further contributed to turning historically profitable businesses into loss making entities, thus stretching cash reserves.

Cash crises occur when a company is experiencing short term liquidity difficulties. Common indicators of crisis situations include: breaching, or close to breaching, banking facilities; experiencing difficulty in meeting short term funding requirements; and, being under prolonged pressure to pay creditors. 

Absent a crisis, cash management is still important, for example, when organisations are trying to release cash for expansion, whether for an acquisition or developing new lines of business.

There are a number of initiatives that business owners can implement to protect the entity’s longer term viability, and to enable more effective cash management and information flow, including:

1. Cash flow forecasting 

Cash flow forecasting is a critical tool which organisations of all sizes use, and rely on, to manage their business. 

As a minimum, businesses should generally consider utilising a cash flow forecast, which runs for at least one year, broken down by month. 

Depending on factors such as seasonality, nature of business and current state, a weekly cash flow may be more appropriate. In crisis situations, more detail and granularity is usually required, which can be obtained by maintaining detailed rolling 13 week (or three months) forecasts. 

In severe conditions, it is not uncommon for businesses to adopt daily cash flow forecasts, at least for an initial two weeks or until the crisis is averted. 

2. Timely and readily available financial information 

Businesses should have clear monthly reporting time frames that enable financial information to be available to key decision makers within 15 to 30 days of month end. Any longer than this generally makes it more difficult to manage the cash position of the business.

3. Implementation of controls over cash 

Businesses should have a series of tight controls over inflows, outflows and related activities. The controls implemented should display a number of characteristics including segregation of duties, appropriate security deterrents and strict authorisation and approval policies.

4. Sensible working capital management 

Working capital is commonly defined as current assets less current liabilities. Typically, its main components include: inventory, accounts receivable and accounts payable. Managing working capital provides businesses with an additional tool that may allow them to address immediate liquidity issues.

5. Promoting a corporate cash culture 

A cash culture should be embedded in the business, which ensures cash management is a key priority and focus going forward. Often a ‘cultural reset’ is required in order to facilitate and develop a corporate-wide cash focus. 

One method of achieving this can be, for instance, to link the remuneration of key personnel within the business to the cash flow performance of the business (through a combination of revenue, working capital management and cost optimisation measures).

From a strategic perspective, cash and cost management improves profitability by reducing cash wastage and inefficiencies in the business, enhancing funds available for investment and reducing cost. In the shorter to medium term, cash and cost management can be used to improve the visibility and reliability of information and improve key business functions, which will decrease margin pressures. 

Cash and cost management is most commonly utilised in crisis scenarios, where a rapid reduction of costs is required in order to stay in business.

Extreme situations such as this may result in the cessation of all non-essential spend, and rarely allows business owners to make measured strategic decisions. Instead of implementing cash and cost management initiatives as a last resort, business owners should adopt it as a key “business as usual” mechanism that can be used to streamline their operations and enhance competitiveness. 

Steve Woodward is managing director and Head of KPMG Bermuda’s Enterprise team, providing audit and advisory services to a broad range of Bermuda-based clients in the retail, hospitality, public and commercial sectors.