In this article, the first of two, Gilroy Gannon take a look at Cashflow and suggest some of the ways companies can ensure strong regular cashflows to provide certainty and stability.
It is essential that companies have a strong and consistent system for monitoring and administering cashflow. Without a good cashflow no business can pay salaries, buy stock or materials or plan with any degree of certainty for the future. Businesses sometimes overestimate sales or underestimate out flows such as bills falling due. A good system, properly utilised will safeguard against liquidity issues.
Make Your Cash Work
The options for businesses to earn interest on balances held in bank accounts are virtually non-existent with low ECB rates meaning banks are increasingly charging to hold money on deposit.
However to minimise banking costs check what each bank will offer to new business account holders, particularly one with a strong financial track record.
Be careful not to over-commit funds to longer term accounts where money is locked in or incurs heavy penalties if withdrawn early. While this may seem tempting with better returns on offer it may leave the business exposed to unforeseen cash requirements.
Make sure to use separate accounts to lodge forecasted payments to revenue such as VAT , Corporation Tax and employment related taxes and also set up a payroll account.
If the business funds allow for it, a percentage of any cash retained as profit within the business should be retained for unforeseen circumstances as a sort of rainy day fund.
It is also worthwhile reviewing the company overdraft arrangements and charges as it may be more suitable to increase cashflow by considering a term loan where interest is allowable as a tax deduction.
Credit & Debt
Another obvious but surprisingly under utilised method of reducing a businesses working capital requirement is to improve credit terms with suppliers while also increasing the rate of debt collection.
Where possible, the best scenario is that your company can receive at least 30 days credit while avoiding providing credit and receiving payment immediately for services (or products) provided.
By clearly stating the terms in any initial agreement or transaction your customer knows what to expect for future transactions.
In cases where offering credit is necessary a good system of escalating written and verbal reminders is crucial to allow your business to stay on top of aged debt.
Offering to take payment via credit card, direct debit and as many other ways as possible increases payment rates.
In the next article we will look at further ways to improve and maintain cashflows.
At Gilroy Gannon we blend nearly 50 years of business and accounting experience with the most up to date accounting practices to provide our clients with the best outcomes and concise relevant advice.
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