| There is a fundamental difference between cash | | | | capital investment in the business to protect the |
| flow and net profit. Net profit is the bottom line | | | | working capital requirements. |
| of the profit and loss account measuring the net | | | | There are many cash flow issues in this area but |
| growth in financial value. Cash is the business | | | | consideration may be given to how fixed asset |
| liquidity and closely related to the changes in the | | | | purchases are financed. In days of the credit |
| value of the current business assets in the | | | | crunch it may be safer to lease or buy major |
| balance sheet representing the amount of money | | | | items on hire purchase than to buy outright. |
| the business has at its disposal to generate | | | | Different and alternate methods of financing |
| further business. | | | | investments can broaden the funding options open |
| Stock control management | | | | to a business and reduce the strain on working |
| The objective is to reduce the level of stock | | | | capital. |
| which uses working capital within the business. | | | | Consideration might be given to delaying the |
| Stock control is a major potential area where | | | | purchase of non essential renewable assets. For |
| every business can become more efficient in its | | | | example the business may have a policy to |
| cash requirements. Stock comprises of four main | | | | replace the delivery vehicle or representatives car |
| elements, raw materials, work in progress, | | | | every three years. Delaying the replacement by |
| finished goods and consumable stores.. Each area | | | | six months saves valuable cash resources and |
| can be managed to reduce the working capital | | | | protects the cash flow. |
| requirement with an appropriate stock | | | | Consideration in larger companies with numerous |
| management system being adopted. | | | | investment projects may be to prioritise the |
| Raw material stocks can be reduced by setting a | | | | fastest cash generating projects. Capital |
| just in time stock control policy, negotiating better | | | | investment often requires high initial investment |
| delivery schedules and reviewing order quantities | | | | which is repaid slowly over a period of years and |
| with a view to reducing the value of stock held | | | | a reduction in approval rates for such projects |
| before it is required for production or sales. | | | | can have significant impact on liquidity. |
| Work in Progress is mainly a manufacturing area | | | | During the early days of a credit crunch and |
| and governed by the manufacturing process | | | | potential recession consideration should be given |
| however a review of the policies can produce | | | | to reviewing all non or low performing areas of |
| efficiencies if excess products are left lying | | | | the business with a view to selling these business |
| around waiting to be finished or excess materials | | | | areas or assets ensuring they do not become a |
| are on the shop floor waiting to be used. | | | | drain on the cash resources but instead produce a |
| Standard levels of finished stock should be set to | | | | positive cash flow the remaining parts of the |
| satisfy the requirement to supply all customers on | | | | business can use to generate higher profits. |
| time but avoid excess stock. Delivery schedules | | | | Funding management |
| might be reviewed to ensure delivery times can | | | | The objective is to achieve at lowest interest |
| be shortened to reduce the requirement for | | | | rates possible adequate funding for all the business |
| higher stock levels. Ideally the stock should come | | | | cash flow, working capital and investment |
| in one door and be invoiced out the other door | | | | requirements. |
| the same day. | | | | Planning is essential to make sufficient |
| In some businesses consumable stores may be | | | | arrangements well before the cash is required t6o |
| significant and where any significant working | | | | enable a satisfactory level of funding at an |
| capital investment is required the policy should be | | | | acceptable rate. Negotiating when a business runs |
| reviewed to save cash by introducing stock | | | | out of cash is the very worst time to negotiate |
| control measures. | | | | funding as it will cost more and may not be |
| Profit margin management | | | | obtained at all. |
| The objective is to sell more cash flow friendly | | | | There are benefits to reviewing the number of |
| products. | | | | sources of finance and funding available to the |
| Given a range of products within a business the | | | | business and the interest being charged. Relying |
| gross profit and stock requirements and funding | | | | upon one funding source may be putting all the |
| requirements may be variable. During a credit | | | | eggs in one basket. With a range of potential |
| crunch the products offering the highest gross | | | | funding sources smaller amounts can be raised |
| profit, fastest turn round and most economic use | | | | with each the sum often being higher than might |
| of working capital would offer the best options to | | | | be available from a single source. |
| reduce the credit crunch effect. | | | | Alternate sources may include leasing and |
| A sound management policy would be to review | | | | financing companies, banks and specialist lenders |
| all products in terms of the working capital | | | | such as stock finance businesses and factoring |
| requirements and levels of gross profit margins | | | | companies. One disastrous source a small business |
| with a view to concentrating sales growth in | | | | should avoid at all costs would be to finance the |
| these product areas. | | | | working capital through credit cards where the |
| Financial investment management | | | | interest rate could be so high it could cripple the |
| The objective is to reduce the draining effect of | | | | business. |