This may sound very obvious but,in practice, a healthy and committed attitude to financial matters is often overlooked.

Many small businesses deal with such issues on a reactive basis. Needs that could have been anticipated and easily dealt with are ignored, thus leading to operating problems.

It is probably true that most businesses invest more time in business operations than they do with managing their relationship with bankers or other suppliers of funds. This should not be the case. The first step therefore should be always to foster a positive attitude of commitment to financial matters in your organisation.

The most common financial issues faced by small businesses are:

• Cashflow
• Management of working capital
• Obtaining finance

The Importance of Cash
The majority of business decisions taken generate either a cash inflow or a cash outflow. The key difference between the inflow and the outflow is that only the outflows can be totally controlled within the business. Inflows depend on outsiders behaving in an agreed fashion (i.e. suppliers paying on time). Accordingly, payments for outflows can be controlled by a budget but inflows can only be forecast. It is vital that realistic assumptions are made when forecasting inflows, and if these do not materialise, then management can react by varying planned expenditure.

Therefore a budgeted cash flow plan is essential, if cash is to be properly managed and controlled.

Other suggestions for managing cashflow include:

1. The payment of taxes via the Revenue direct debit system for VAT and PAYE/PRSI.
2. Making provisions during the year for any balance of personal taxes due.
3. If your turnover is less than €634,870, taking advantage of the cash received basis of returning VAT on sales.
4. Efficient remuneration of staff to save on PAYE/PRSI.

Management of Working Capital
The elements of working capital are stocks, debtors and creditors. Actions or initiatives that affect any one of these has an impact on the overall level of working capital required in the business. Therefore management of these components is vitally important:

Stocks
The introduction of a stock management system will assist in making more cash available to the business. Such a system involves:

1. Setting targeted stock levels
2. Monitoring all variations
3. Identifying and eliminating slow moving items
4. Using a stock policy i.e. economic order quantity etc.
5. Stock rotation.

Debtors
The target of every business should be to collect all debtors within its credit terms. An aged debtors listing is essential to monitor cash collection as part of an overall credit control policy. Such a policy should include:

1. Checking new customers with a credit rating agency
2. Asking for financial references from new customers
3. Asking for bank guarantees for major contracts
4. Adoption of conservative credit limits initially until experience with a customer builds up
5. Prompt reduction of credit limits if concerns arise about a customer's credit-worthiness
6. Reservation of title.

Creditors
The objective should be to avail of the maximum credit period while preserving a good payment record. Possible actions here are:

1. Buying on sale or return
2. Negotiation of terms such as settlement discounts, discounts for bulk or LTAs (long-term agreements, where, if a target level of purchases is met, a percentage rebate is given - these are common in the grocery and motor industries)
3. Financing expense creditors over short periods e.g. accountancy fee finance or insurance premium finance - interest rates charged here are generally low and tax-deductible.

As a measure of working capital performance, ratios are normally used e.g. current assets ratio, stock turnover, debtor days and creditor days.

Conclusion
One thing remains clear, cashflow and strong working capital management are vital in any business big or small.

If you need any further information or assistance in relation to the above article, please contact Deirdre McDermott, Manager - OSK Audit on T: 01 439 4360 or E: mcdermottd@osk.ie.