Cash Is The Tactic

by: October 12, 2015

For every single business, the effective generation and management of cash* is of critical importance. Yet many businesses plan on a P&L basis alone and neglect to properly consider cash.

It’s not uncommon for businesses to fail because they grow more rapidly than their cash reserves can support. They might be making plenty of profit but run out of cash, and no cash to pay employees and suppliers equals a bust business.

Cash Is The Tactic

Practically all businesses require cash, often lots of it, in order to generate growth, before there is a positive contribution to their cash balance from the growth initiative. This might for example be for investment in product development, in manufacturing facilities, in people, in stock, or in marketing. It can be months, sometimes years, before such investment becomes cash generative.

Not only that, but most businesses go through peaks and troughs in sales, or seasonality, during which overheads might well be greater than income, and cash is needed to tide one through such periods. And in a business where margins are tight, and/or times are tough, cash can be pretty tight too, so its effective management is essential.

If tactics can be put in place to maximise cash balances, then the business is more likely to survive, growth becomes possible and can be more rapid, and unexpected costs or poorer than expected sales are not so stressful.

Sound like a pretty useful thing to do? Then follow these 6 key tactics to maximise cash:

  1. Plan Based On Cashflow

The financial aspects of a business plan typically focuses on P&L, broken down into monthly figures. The problem is that this doesn’t provide a measure of cash in the bank. So the answer is to have a cashflow plan as well, showing the bank balance at the start of each month, what’s coming in and what’s going out, and the bank balance at the end. For some businesses, doing this on a weekly basis may be important. The cashflow plan will show when cash is tight, making it possible to plan ahead by taking action now in order to prevent a crisis at a later date.

  1. Manage Overheads

Overheads, especially those that have little impact on profitability, should be managed carefully. It’s sometimes a good idea to list overheads and categorise them into ‘Essential’ and ‘Desirable’, which helps when it comes to cutting expenditure. Many costs can be moved so that they are a variable rather than fixed cost, or spread over a longer period. Consider sub-contractors instead of permanent employees, leasing equipment rather than purchasing it, and creative utilisation of office space. I heard of one business that paid rent based on a proportion of sales when it started up – no sales, no costs – quite an interesting way of keeping cash outlay to a minimum.

  1. Consider Cash Implications of Sales

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Very simply there are three critical factors to take into account – will the purchaser pay, how long will they take to do so, and what costs will be incurred before payment is received.

a) Every time credit is provided we are taking a risk that we will not receive payment. This can be minimised by properly considering the credit risk of the purchaser but nonetheless it cannot be completely eliminated – sooner or later there’ll be someone who doesn’t pay. So the bigger the deal and the bigger the risk, arrange payment terms that reduces the business’s exposure. If payment isn’t made, seriously consider stopping doing business with them.

b) Payment terms should be expressly agreed upfront – it’s important that these aren’t hidden away in the small print, only to discover that the customer hadn’t noted them when signing the purchase agreement. Building a good working relationship is important here – chasing for payment can feel alien to a sales person but it’s a highly effective method of credit control if there’s a good relationship. It helps too to have a good relationship with the purchase ledger clerk and, if the amounts are large, the finance director.

Understanding the customer’s payment process can make a big difference. For example if they have a sole monthly payment run, invoice dates need to be synchronised with their cut-off date in order to hit the next run. And instead of only calling to chase payment when it’s overdue, it’s best to call before the payment is due to confirm when it will be made.

c) If there are costs associated with a sale, look at when those costs are going to be incurred and whether it has an adverse impact on cashflow.


  1. Optimise Purchasing

“The money is better off in my bank than theirs” is something I have heard said many times by people in finance departments, but this is a short-sighted view. In today’s business world, relationships are what matter. When negotiating with suppliers who ask for payment in 30 days, seek an early payment discount; 2% off an invoice for paying early may be a better return than keeping the money in the bank.

It’s in the supplier’s interest to maximise the success of their customers (=more orders for the supplier), so it’s sometimes feasible to agree payment terms that fit in with when we’ll receive payment from our customers. Again this is all about relationships – if we treat suppliers well, communicate with respect, pay them on time, there’s every chance they’ll go that extra mile to support us.

If the business holds stock, check levels, flow rate or usage. Sometimes there’s a lot of stock, probably bought and paid for (i.e. from cash), sitting on the shelf, but unusable as cash. If it isn’t moving then it’s best to dispose of it. As a colleague once told me – “it ain’t going up in value”!

  1. Margin For ‘Errors’

It’s never a straight line between here and there in business. Things change, they don’t work as well as we expected, they go wrong. There will be issues such as poorer than planned sales, slower payments, bad debts and unexpected costs.

Therefore effective cash management must take account of this margin for error and plan accordingly. A buffer zone of certain amount kept in the bank account, or a pre-agreed overdraft facility are ways of weathering the minor storms that will hit, and preventing them becoming the hurricane that destroys the business. Most importantly, model possible issues into the cashflow forecast, and make sure action has been taken ahead of time.

  1. Monitor Frequently

Monthly at least. If the cashflow forecast is kept up-to-date on a regular rolling basis, the model will improve and we’ll always have our fingers on the pulse when it comes to managing the cash in the business.


*= ‘Cash’ is used in business terms to refer to liquid assets, normally the money that’s in the business bank account, not the notes and coins in your pocket (although you can include those if you want).


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About Author

Mark is a Partner at Zonata. He is passionate about business success, having built and managed three businesses through to exit. He frequently writes and gives talks on strategy planning, business development and solution finding via lateral thinking.

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