Difficult Times Require Good Cash Control – But How Can It Be Improved?

In all times Cash is King! In difficult times it is even more important.
Before looking for external loans, much can be done to generate cash internally.

Don’t just borrow cash, generate it!


Cash Control Tips:

  1. Monthly KPIs (Key Performance Indicators)
  2. Targets
  3. Improve Working Capital Cycle
  4. Credit Control System
  5. Negotiations
  6. Cash Flow Forecasts (CFF)
  7. ROCE
  8. Use Specialists


1. Monthly KPIs

What isn’t measured won’t be controlled!

All management information should be Accurate and Timely.

Management need to know each month the average days it takes for customers to pay, the credit taken from suppliers and the days stock held.


2. Targets

Have monthly targets to improve average debtor, creditor and stock days.

An initial target should be to have debtor and stock days less that creditor days

  • Manufacturing

    • Often CoS has large wage element (with minimal credit)
    • Therefore, creditors can be lower and less important
    • Stock for RM lower, but higher WIP
    • Need long term financing for P&M and other Fixed assets (not working capital)
  • Retail

    • Customers frequently pay cash
    • Therefore, Lower debtors
    • FMCG require very low Stock with a fast turnover (eg milk, dairy, meat etc)
  • Distribution (buying & selling)

    • High Stocks, Debtors & Creditors
    • Value of Rebates in Stock
  • Services (e.g. FD Services)

    • Often low CoS, Creditors and Stock (RM)
    • High Debtors
    • Can be WIP


Many other factors will affect the working cycle eg imports and exports

Many other factors will affect cash control e.g. Fixed Assets, profitability, investors, bonuses, dividends, HP & loan repayments etc.


3. Working Capital Cycle

Every owner owner/manager needs to know what time does it takes from receiving a sales order to getting paid by the customer?

WCC refers to the time taken by an organisation to convert its net current assets and current liabilities into cash. Therefore, a business needs to shorten the working capital cycles to improve the short-term liquidity condition and increase efficiency.


What is Days Working Capital?

This is how many days it takes for a company to convert its working capital into revenue/cash. The more days a company has of working capital, the more time it takes to convert that working capital into sales. The days working capital number is indicative of a good or inefficient company.

A sale isn’t a sale until the cash is received.


4. Credit Control System

Operate the “Pareto Principle” (80:20 rule). Spend 80% of the time chasing the 20% of the customers with 80% of the cash target.

Don’t just concentrate on the very overdue amounts. Size does matter!

Make early calls for the 80% of cash required to ensure invoices have been passed for prompt payment. Take away the excuses and don’t allow hold ups!

For relatively small late payments have a two-letter system. The first is polite requesting payment. The second threatens legal action in seven days.

Do the above and potential bad debts stand out like a sore thumb.


5. Negotiations

Be firm but fair, with customers and suppliers alike, then deliver what you promise.
Management won’t be respected unless firm.

If you support struggling customers ask in return for say half to be paid immediately, as an “act of good faith”.
If you allow customers to waste your time waiting for payment, many will do so.

Payment Terms are part of the Price! If you obtain more favourable terms from a supplier, with the same service, quality and price, that is the best option. Similarly, if customers want extended payment terms, but low prices, they are not as favourable as the customer who pays quicker.


6. Management Information System

Monthly Management Accounts

Need to be Accurate and Timely. Most large companies (eg PLCs) will prepare accurate management accounts within 5 working days of the month end. This is not onerous. Being totally up to date increases efficiency.
The recommendation for private limited companies is 10 to 12 working days after the end of each month but no later.

Should be bespoke to enable management to best run the company, not just in a statutory format, designed for Companies House.

To include Profit and Loss account for each operating unit and/or division and/or product group. To be tailored towards needs of management, not just in statutory format for the limited company as a whole.
To include a monthly balance sheet. The statutory format, of net assets on the one side and shareholders’ funds on the other, is limited in terms of information that is useful to run the company. This would include overdrafts and loans to the company as current liabilities. Instead, try the format of total net assets (excluding loans and overdraft) on the one side and Capital Employed on the other side (including all forms of borrowing).

The above format of the balance sheet enables return on capital employed (ROCE) to be readily calculated.

Early Warning Signs of Problems

If anything is going wrong in the business, then management need to know and to fix the issues. The longer a problem goes undetected then the bigger it gets (a stitch in time). This why management accounts need to be “bespoke, accurate and timely”.

The management accounts should show full variance analysis with actual results versus budget/forecast.

In this way sales and gross profit need to be broken down by division and/or salesmen and/or product groups etc.

Any problem areas with overheads will be identified with resulting adverse variances.

Generally, management need to concentrate on the adverse variances. However, the favourable variances may identify areas for greater resource allocation eg a new product with sales greater than expected and/or higher than usual gross profit margins.

In difficult times companies may be losing sales and margin, in which case there may be a need to quickly cut costs. This variance analysis will assist such decision making.

This isn’t called “financial control” for nothing!

Budgets and Plans

A vision without a plan is little more than a dream!

“A vision without a strategy remains an illusion.” – Lee Bolman.

A defined strategy is aligned with your company’s values and forms a steady path to reach your targets and fulfil your corporate purpose.

Plans should address all aspects of the business. Typically, a business plan will be for about five years. The marketing plan should include all aspects of the four Ps ie Price, Product, Place and Promotion.

The external environment will continually change for political, economic, social, technological and other reasons. Consequently, plans need to be reviewed and updated at least on an annual basis. Plans need to include financial profit/loss and cash flow forecasts.

budget is a financial plan for a defined period, usually one year. It may also include planned sales volumes and revenues, resource quantities, costs and expenses, assets, liabilities and cash flows. … It may include a budget cash surplus and/or profit, providing money for use at a future time, or a deficit/loss in which expenses exceed income.

Cashflow Forecast (CFF)

This is required for the company as a whole on an annual basis.

It may require updating on a regular basis eg quarterly and actual performance compared to forecast, especially in difficult times.

Growing businesses usually require far more cash than the profits generated. Hence the need for forecasts. Even profitable businesses can easily run out of cash. Hence the need to forecast how much money the business may need to borrow or generate internally.

These forecasts need to include the profit or loss, depreciation and corporation tax, as well as all movements in assets and liabilities, plus investment in the business (if any).
The definition of insolvency is not being able to pay one’s debts as and when they fall due. Even profitable firms can become insolvent. Hence the need to have CFFs to determine needs, to be able to control working capital and have long term borrowings for fixed assets with a long-term life spanning a number of years.

Key Performance Indicators (KPIs)

What can’t be measured won’t be controlled!

Key Performance Indicator is a measurable value that demonstrates how effectively a company is achieving key business objectives. Organisations use KPIs at multiple levels to evaluate their success at reaching targets.

KPIs need to be bespoke to enable management to best control their business(es).

Examples of KPIs for businesses are:

  • Sales per Day/Customer
  • Net Profit Before Tax (NPBT) (and NPBT %age of sales)
  • Gross Profit (GP)% for Company
    • Also analysed by Division, Product Groups, Representatives etc
  • Cost of Sales (CoS)% for Company
    • Also analysed by Division, Product Groups, Materials, Labour, Overtime etc
  • Working Capital Cycle, debtor days, creditor days, stock days etc
  • Return on Capital Employed (ROCE)


7. Return on Capital Employed (ROCE)

The “acid test” of a really successful business.

This KPI is rarely, if at all, used by SMEs or external accountants alike.
Don’t just look at profits, compare them to capital employed.
Capital Employed being the amount of money required to generate (or tied up to achieve), the actual level of profitability.

The lower the working capital (plus fixed assets) the higher the ROCE.
Rearrange the balance sheet from the statutory format to show total (net) assets and Capital Employed (which should be equal).


8. Use a Specialist!

Need help with the above? Then use a specialist.

External accountants may be excellent auditors and/or tax advisors, but rarely have relevant experience at controlling cash and implementing effective systems and accurate KPIs. They are usually GPs.

If you think a specialist might be expensive, try operating without one.


Example:            sales £5m pa GP 25%        O/Hs £1m = NPBT £250k pa

Cash Saving:     Stock reduction £470k        (90 to 45 days)

Receivables: £280k +          (67 to 50 days)

Payables: £560k +               (45 to 91 days)

Net WCC Total: from 112 days  to 5 days!!



Written by:

Paul Webb FCCA Dip M, FD Services
“Big Company Controls for SMEs”

E: paul@financialcontroller.biz
M: 07796 266 810

April 2020


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