Manage Your Cash

Cash is King when you are running your own business and potential for short and long-term success. This is why Riyad Bank is offering to help you manage your cash liquidity effectively.

The fact is that the cheapest source of money you can find is already in your business. In good times and bad, it is always a sound practice to manage for cash or what accountants refer to as “liquidity”.

This Business guide is focused on liquidity and how you can squeeze the last Riyal out of your operation to help you increase your profits and reduce the risks.

Cash

Speed up the flow of incoming cash and slow down the outgoing by making full use of tools that are available to you.

  • Speed up deposits by:
    1. Leveraging your bank’s cash
    2. Management services
    3. Using electronic transfer
    4. Depositing cheques daily
    5. Monitoring overdue receivables daily
  • Control and slow down the outflow by:
    1. Watching petty cash and advances
    2. Using credit cards for employee expenses (helps record-keeping and reduces cash advances)
    3. Paying Zakat and bills only when due
  • Make use of cash available by:
    1. Using cash management services to consolidate your balances where appropriate
    2. Putting cash into short-term, interest-bearing deposit instruments

Credit Practices

Few businesses can operate with cash only, which is without any credit. However, in the granting of credit, there is a fine balance between providing an incentive to close a sale and losing control of your assets.

  • Establish limits for each category of customer and stick to them
  • Tighten the limits when times are tough and for customers in weak industries
  • Beware of the long-established company that suddenly wants to become a customer; has the company been cut off by someone else?
  • Use information from banks, Chamber of commerce and other sources of credit and non-credit information
  • Consider insuring your receivables if possible
  • Charge interest on overdue accounts
  • Consider accepting a MasterCard, Visa Card or other credit cards

Accounts Receivable

Once you have decided on your credit policy, make sure you monitor your accounts. Do not be frightened to be tough. Good customers respect others who manage their businesses well.

  • Invoicing and statements:
    1. Invoice the same day you ship goods
    2. Issue statements at least once a month (if you have many accounts, consider issuing statements on a cyclical basis, not just at the end of the month)
    3. To those who honor statements only, issue statements faster
  • Monitoring:
    1. Always monitor receivables by dividing them into categories: 30 days and less; 30 to 60 days; 60 to 90 days; 90 days and more
    2. Monitor “long” accounts frequently, even daily
    3. Cut off and do not ship to overdue accounts. But consider: progress or partial payments; post-dated cheques; COD (Cash on Delivery) next order; extended terms, which you must get in writing
    4. Are customers taking discounts after the discount date? If so, debit them back with the next invoice
    5. Consider, if possible, “current asset financing” using a third party to manage all credits and receivables for you
  • Collecting:
    1. Be alert for signals of future problems. Have the following brought to your attention: post-dated cheques; stale-dated or incorrectly written cheques; late returns/excessive warranty claims; lump sum payments
    2. Have a good system of collection letters. Also use email and the phone
    3. Consider using a collection agency. Annual fee includes use of agency letters and advice on credit procedures; collection fees only apply when money is collected
    4. Move quickly with liens

Tip: Failing customers often provide many clues before leaving you holding a bad debt.

Sales & Distribution Policy

Selling a product or service that is grossly under priced is easy and it’s simple to attract customers when you accept all returns without question. Before you establish costly policies, consider the following:

  • Know the gross margin on all your products
  • Reward sales personnel on the basis of the gross profit received, not on volume invoiced. Why reward a sale where the customer does not intend to pay?
  • Be cautious with warranty/return and service policies; monitor accounts and cut off abusers, if necessary
  • Maintain a minimum order/delivery policy and have customers group or block their orders
  • Beware of a single large order, especially one-time sales to governments or very big institutions. If the customer is slow paying, you may find yourself in a cash crunch; negotiate progress payments whenever possible
  • Know which 20% of your customers account for 80% of your sales

Decide where you fit in the distribution network and stay with it. A manufacturer has a high gross margin, but also has a high investment in fixed assets such as plant and equipment. A wholesaler has lower gross and less tied up in fixed assets, but more in inventory. As for a retailer who looks at gross as a mark-up, the biggest investment is in inventory, often with no fixed assets at all.

Tip: In times of trouble it is easier and safer to lower overheads than to increase sales.

Which are you? Crossing two types of business often leads to a company that is only half as effective. Consider the following:

  • Test different price levels and maintain prices consistent with your quality and image by surveying customers
  • Check your industry statistics to see how you compare against the norm. Ask your banker for information and also check with provincial and government information offices (Ministry of Commerce) and the Small & Medium Enterprises Centers
  • Watch your break-even. If your gross margin is 33.3%, SAR 1 saved in overhead is worth SAR 3 in sales

Purchasing Policy

Purchasing is the start of cash outflow, so watch it carefully. Overzealous purchasing is an easy way to lose control of cash, so consider the following:

  • Do you have a simple re-order policy based on past inventory levels and future targeted inventory turnover?
  • Under whose authority does your purchasing function?
  • Do you know the cost of carrying inventory (warehousing, handling, interest costs, and so on)?
  • If you had a three-month supply of product and the manufacturer offered you a discount of 10% to take another three-month supply, would it be to your advantage to accept? (The answer is probably no, but work it out)
  • When ordering large quantities from a major supplier, can you arrange staggered release and shipment?
  • Do you have alternative sources of supply?
  • Get quotes from major suppliers; shop around
  • If a supplier lets you down, can you charge back the cost of the delay
  • Is help in planning and control of inventory available from any of your suppliers?
  • Is cash flow planning services available through the supplier, a bank or other financial source?
  • Which suppliers have a return policy?
  • Make sure cost increases can be passed on quickly with price increases

Payables

Your payables represent actual cash flowing out from your bank account. Make your payables more cost-effective by preparing for them in advance. To be more efficient with payables you should consider the following:

  • Break payables into 30, 60, 90, and more than 90 days
  • Segregate all accounts payable by type:
    1. Offering discounts
    2. Ones that are demanding
    3. Ones that allow you to run long
    4. Ones which charge on overdue accounts
  • Find out if extended terms are available from key suppliers at a critical times in the year, or at any time
  • In extreme circumstances, will a supplier take post-dated cheques, accept COD on new shipments and give extended terms at reasonable rates?

Inventory

For many businesses, inventory is needed. But excessive inventory can mean the difference between profit and loss. Don’t tie up money in assets that don’t earn money:

  • Analyze your business by each product and each product by raw material, finished goods, and so on
  • Track the number of times each major item turns over in a year
  • Compare, if possible, your figures to the industry average
  • Set targets that are realistic, and then set up a re-order system
  • Sell off or return any outdated or slow moving materials and merchandise; they will only get more difficult to sell with time
  • Is warehouse receipts financing available?
  • Consider having some of your product manufactured under license rather than making it yourself
  • Are you demanding too much in the way of quality control?
  • Is your security preventing theft?
  • Use the ABC system; and use perpetual inventory on all the important items

Production and Operations

Ensure your employees are aware of your costs so they can better participate in cash management.

Also keep fixed costs low; wherever possible, turn fixed costs into variable ones.

  • Have regular meetings to review scheduling (sales, production, and so on)
  • Ensure your bookkeeper is aware of, and monitors fees negotiated with your suppliers and service providers
  • Always retain some flexibility for the future such as unused borrowing capacity and sufficient cash to meet increases in costs
  • Borrow long term for long-term needs, short term for short-term needs
  • Try to match the term of the loan with the useful life of the asset, i.e., a five-year life requires a five-year debt
  • Lenders look at the stability of your company, so they consider retained earnings as well as historic profit and cash flow performance along with the security you can offer
  • Keep total debt to equity in line: preferably 1:1 and never more than 3:1
  • Be sure you have a comfort margin in your cash flow to service debt, say two to two-and-a-half times. Example: debt service is SAR 25,000 per annum; profit before depreciation but after taxes at SAR50,000 equals two times margin
  • Explore various sources of capital; expect the best treatment from those who know you and/or know your industry
  • If you foresee problems, discuss them with your banker or other major creditors before disaster strikes.
  • In deciding on what type of financing and how much, remember the bottom line is profit on your total invested capital
  • If you have unused or under-utilized assets such as a building or equipment, consider leasing them out, selling them or sub-contracting the under-utilized time
  • Consider sale and leaseback, with option to buy the assets when you have more cash
  • If your assets have gone up in value over the depreciated value shown on your books, you may have some unused borrowing capacity; use it wisely
  • The value of your assets requires that you keep them in good order; ensure you have proper maintenance and service schedules
  • Before purchasing an asset, be sure you are getting a good return on your new investment – that means, after taking into account all related costs including interest, labor, overhead, property taxes, and so on
  • All purchase decisions need to be sound from a cash flow point of view; even if you can make a profit on the investment, it’s still an unsound purchase if you don’t have the cash to service the investment
  • Calling: 9200 01 816

Debt Management

Other people’s money is fine, if you use it wisely.

  • Borrow long term for long-term needs, short term for short-term needs
  • Try to match the term of the loan with the useful life of the asset, i.e., a five-year life requires a five-year debt
  • Lenders look at the stability of your company, so they consider retained earnings as well as historic profit and cash flow performance along with the security you can offer
  • Keep total debt to equity in line: preferably 1:1 and never more than 3:1
  • Be sure you have a comfort margin in your cash flow to service debt, say two to two-and-a-half times. Example: debt service is SAR 25,000 per annum; profit before depreciation but after taxes at SAR50,000 equals two times margin
  • Explore various sources of capital; expect the best treatment from those who know you and/or know your industry
  • If you foresee problems, discuss them with your banker or other major creditors before disaster strikes.
  • In deciding on what type of financing and how much, remember the bottom line is profit on your total invested capital
  • If you have unused or under-utilized assets such as a building or equipment, consider leasing them out, selling them or sub-contracting the under-utilized time
  • Consider sale and leaseback, with option to buy the assets when you have more cash
  • If your assets have gone up in value over the depreciated value shown on your books, you may have some unused borrowing capacity; use it wisely
  • The value of your assets requires that you keep them in good order; ensure you have proper maintenance and service schedules
  • Before purchasing an asset, be sure you are getting a good return on your new investment – that means, after taking into account all related costs including interest, labor, overhead, property taxes, and so on
  • All purchase decisions need to be sound from a cash flow point of view; even if you can make a profit on the investment, it’s still an unsound purchase if you don’t have the cash to service the investment

Fixed Assets

The primary goal of a successful owner-manager is to manage assets effectively, not to own them. Assets do not necessarily generate profits.

Putting It All Together

You are in the centre. Around you are people and physical assets.

  • People, your employees, are your most valuable asset through whom all your plans and objectives are carried out. Involve them; they can’t help you if they don’t know or understand your work
  • Ensure you use the physical assets fully and wisely; if you can’t use them, sell them or let others use them by contracting them out
  • Your job is to manage and synergize people and your assets to work together effectively
  • Set objectives and targets: short-term, one-year, and up to five years. Express in Riyals sales, gross profit, selling costs, overhead including interest costs, and pre-"Zakat" profits
  • Create a plan, a road map and make sure you involve your people so it’s their plan as well
  • State your budget targets in specific riyal amounts and periods of time
  • Managers must control and measure
  • Provide feedback to let people know what’s happening; if you have to make changes, keep employees in the loop and involve them in setting the revised objectives and plans
  • Management doesn’t stop; it’s continuous and dynamic, and your success depends on how well you involve and utilize all your assets

Cash is your most easily measured asset. Keep track of it and use it wisely.

Tip: A good manager doesn’t keep his/her stakeholders in the dark.

For further information please contact your local Business Banking Officer by: