The difficult economic conditions have led to greater emphasis by business managers on their treasury and cash management systems. Many small businesses have been impacted by rising costs and increased competition affecting revenues. Strong cash management is critical in the current environment .
In order to assess the effectiveness of existing cash management policies, businesses must review their processes in respect of the following:
-Effective cash flow forecasting. Budgets must be regularly reviewed and assessed. Regular reforecasting is often beneficial to ensure that management information does not become out of date.
-Management of working capital. Setting up and monitoring of customer credit limits; review of stock levels and adherence to authorisation procedures; credit terms with suppliers; controls over prices on the purchase order system.
-Capital expenditure. Adherence to budgets. Authorisation process.
-Research & Development expenditure. Controlling spend without cutting creativity.
-KPI’s. Develop appropriate KPI’s to monitor cash flow and underperforming products. Consider linking cash targets to bonus.
-Bank facilities. Cash must be monitored in line with the bank facilities available.
-A strong Treasury function will support the business in managing the cost of borrowing and maximising the return on cash.
-Consider the various Sources of Finance. Equity is a long term source of finance and is often the most expensive. Debt is cheaper than equity but increases leverage (or gearing). Businesses must consider their required borrowing facilities. It can be very expensive to renegotiate facilities and covenants if they are not set up correctly first time round. In fact, it is no often possible to go back to the bank and request more money, hence the need for effective and reliable forecasting. Businesses must avoid restrictive charges over their assets and ensure that no surprises are given to the banks. It is also important to understand how the relationship manager at the bank is rewarded.
-Reduce Gross cash positions. It is no good having a large cash surplus in one company and a large overdraft in some of the subsidiaries as an overdraft attracts high interest charges. Businesses can examine the use of a notional offset system through the use of parent guarantees with the bank. Alternately, it may be beneficial to employ a cash sweep system.
-Use of swaps and forward trades. A business with surplus cash in US Dollars can make use of a cash management swap. This is effectively a forward trade to sell the US Dollars and buy them back in the future.
-Consider use of Interest rate swaps. It can be beneficial to employ the use of interest rate swaps in order to enable more accurate forecasting. However, we advise our clients to avoid fixed rate swaps where possible as these tend to cost more and often lock the business into higher rates than other products on the market.
-During these uncertain times businesses are advised to employ credit limits with the banks they use. It is normally advisable to spread your cash around and ideally, avoid holding more than £85,000 in any one bank n order to receive cover from the FSA in the event of a bank default. Businesses should monitor the credit ratings of their banks as a number of major banks have recently been downgraded, particularly in Europe. The recent issue at RBS reinforces the need to spread your cash. RBS had a system issue earlier in the year whereby companies were unable to access their cash for a few days. This could create significant difficulties for a business holding all of their cash with one bank.
It is important to set up a good process over cash even if your business is making money.