Foodservice businesses operate in very competitive markets and so it’s critical to manage common issues that can be prevented through tight management before they impact on the viability of your business.
Sabah Hussain from FIA Member Sabella Consulting says “one of the most common warning signs of business failure is poor cash management. Given the soaring rate of corporate insolvencies, businesses of all sizes are focusing their energies on ensuring their operations are generating a positive cash flow over making a profit".
According to accounting principles, maintaining and enhancing a firm’s cash flow is one of the main objectives of working capital management. Typically, a firm’s working capital includes its current assets for example stock, debtors and cash less the firm’s current liabilities such as trade creditors. Given these components, a firm’s cash flow can be enhanced in the following ways:
Debtors:
Try to speed up collections of your business’s accounts receivable. This can be done by offering incentives to your customers such as discounts for early payment.
Stock:
If the nature of your business requires a significant amount of inventory to be on hand, attempt to adopt an inventory level that balances the anticipated demand for your product whilst simultaneously trying to avoid overstocking in order to minimise the opportunity cost of having cash “tied up” in stock. Achieving this balance is an arduous task as it requires you to accurately forecast both the quantity and time period your customers will purchase your products, however by analysing past sales trends lowers the chances of overstocking and the additional costs associated with understocking hence conserving your business’s cash.
Trade Creditors:
Consider extending your credit terms with suppliers. If you have a good long term trading relationship with your current suppliers, use this as a basis for negotiating longer periods for payment of accounts.
Cash:
If possible adopt an overdraft facility - this will assist funding your operations during periods where your debtors are slow in paying their accounts and when your accounts with suppliers fall due. This may be difficult given that currently financial institutions have more stringent criteria for granting debt. However if your business can demonstrate a strong ability to service its debt, financial institutions should be willing to lend. Alternatively, you can consider implementing a factoring arrangement for your accounts receivable.
Considering all the information above, Sabah’s Guide to Practical Ways of Enhancing Cash Flow and Avoiding Potential Issues includes these five points:
1. Immediately banking cheques when received
2. Complete frequent bank reconciliations to monitor cash balances
3. Be careful when granting credit to new customers. Thoroughly review your credit terms according to the cash needs of your operations
4. Offer direct payment methods for client accounts such as direct deposit, credit or debit cards
5. Adopt an Interest Bearing Deposit account to maximise any idle cash
Increasing a business’s cash flow internally as opposed to increasing sales overall takes common sense. However, if your business is experiencing cash flow difficulties despite having the above measures in place, it is recommended that you consult an external accountant or corporate recovery specialist who can review your financial position especially in respect of your firm’s liability structure and solvency.
For more information contact Sabah Hussain via info@sabellaconsulting.com