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02/02/2012 - Double-dip recession? Who will help mid-sized companies?...View

04/02/2011 - Managing Cash in 2011...View

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04/02/2011 - Managing Cash in 2011

2011 was set to be a challenging year even before the Q4/2010 GDP figures heightened concerns over a ‘double-dip’ recession, but what does a 0.5% drop in GDP really mean?

Think in Cash terms, not inflation adjusted

The GDP figures attempt to measure the change in ‘unit production’ and are adjusted for inflation. Due to inflation, flat GDP would imply a 6% increase in £ sales in the food sector and an 18% fall in £ sales of photographic equipment.

Cross sector average

Across key sectors, the change in GDP ranged from +1.5% to -3.5% and within a given sector performance will vary from company to company. While most companies will ‘hug’ the central rate, around 1 in 6 companies will be growing or shrinking by ten percentage points above or below the mean.

Every business must, therefore, be realistic about their sector and performance in order to assess their true growth prospects, after which they can consider the relevant challenges of managing cash flow:

Growing Flat / small change Shrinking
Cash forecasting

Growth will tie up cash in additional working capital (stock, debtors) and may lead to overheads being added to the business.
A cash focussed forecasting tool will highlight cash spikes and hep you react to changes in the rate and speed of growth.
Your sales may be flat but if your customers struggle they may pay you more slowly. If a competitor fails, and leaves your supplier with a bad debt, your own credit terms and limits may be reduced.- If working capital is controlled as the business shrinks some cash will be freed up, however, concerned suppliers may reduce your payment terms. Forecasting to address these changes, and to ensure a profitable business will remain, are vital.
Credit Risk

Beware of growth by picking up customers that others refuse to deal with. Always credit check new customers and analyse the risk profile of the sales driving your growth.
The credit risk of existing customers should be tracked to avoid bad debts. Assess all new prospects early on to avoid chasing business you do not actually want. As a business shrinks there is a risk that sales staff will try and win business at any cost. This could lead to sales being made to poor credit risk customers, resulting in bad debts. Vigilance is needed.
Credit control

Growth will add to cash tied up with customers. A structured approach must be taken to the terms given to customers, as well as the process of collecting debt, if you are to prevent growth from paralysing your business.
Uncertainty and a tightening of terms from lenders, is driving businesses to hoard cash. Rule based automatic issue of reminders and chasing letters can ensure all accounts, not just key accounts, are chased regularly. Automate the issue of reminders and chasing letters to allow a reduction in credit control head count. Sales staff must be managed to ensure they do not offer extended credit terms in order to win business without getting agreement first.



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