Cash Flow Planning


As discussed in previous articles, the emphasis on cash flow management in a business is the most important but also the least productive function in the general administration of the business.

Without cash, regardless of short term or medium term profitability the business cannot function. If the business is properly financed (the right level of working capital in the business in lieu of current turnover, finance obligations and both supplier and customer credit terms), the concentration on running the business should have less emphasis on daily cash flow issues (but still strong attention to debtor/ creditor control and a proper and realistic cash flow forecasts encompassing all fixed term finance obligations). Instead there should be greater emphasis on business profitability and medium-to-long term planning of future business development.

Proper financial planning in transport means that the business is profitable, that this profitability is accurately assessed monthly, and that all turnover/ expenses are forecasted ahead. This forecast needs to be updated and reviewed monthly as the business environment changes. Once this core piece of information is in place (and bear in mind financial projections are subject to change), then the optimum finance structure should be constructed around this, with adequate short, medium and long term finance.

Starting with long term finance options, investment by shareholders (shareholders equity) and also long term loans (example mortgage on premises), banks now look at 75% maximum loan to value ration and a repayment term of 15 years maximum. What the banks are actually saying is that any future capital purchase by a business will only be possible if liquid funds are in the business, or the business owners have personal funds to invest. In the future assets come to market that are at value but only a business that has the repayment capacity to cover such borrowings from current operations will be considered.

Medium term finance covers term loans and leasing/HP finance. Normally they have maximum terms of 7 years, and while previously finance houses were financing 100% of asset value this is no longer the norm unless the business is financially strong and the finance institution has recourse to additional security. In-house finance packages attached to vehicle manufacturers are strong in the market, promoting sales of their brand through competitive finance rates and the willingness to finance the asset in full. Other asset finance product/finance houses are also in the market whereby interest rates are higher than the pillar Banks and deposits are gained from combining equity in the new asset and a second-hand asset that is free of finance. These are low risk to these finance houses and costly funds but do have quick turnaround times. Medium term funds could also be available from an external investor. Normally this is never seen in transport unless it’s a family investment as the transport sectors’ low margins and high risk involved will not attract any Dragons’ Den investment.

Short term working capital funds are the crucial element of the finance structure of the business. Adequate cash to operate the business, the ability to purchase at favourable rates because of payment ability and credit worthiness, and the fact that adequate cash in the business, properly managed, allows concentration on business profitability and development as opposed to cash flow firefighting, are key ingredients in the success and long term survival of the business. Low or negative profit margins will give rise to cash shortages, but a profitable business that is expanding can also experience cash flow issues because of the payment structure for inputs (example; labour and diesel) and payment terms from customers, which on average are 45 days or longer. An adequate overdraft is vitally important but an overdraft should return to the black during the trading year (min 30 days or penalties occur). If the bank sees the use of the overdraft as a medium/long term liability it will advise this to be moved to term loan, further pressurising cash flow and will be forced over a period to in effect reduce credit available to the business.

Increasingly banks are offering Invoice Discounting as a tool to transport businesses to free up cash in their debtor books and give the business adequate working capital to run the business. Used correctly Invoice Discounting can be a cost effective tool to get working capital for a sector that is deemed high risk. Most business owners associate Invoice Discounting with the old product called debt factoring (in effect the sale of monies owed at a discount to debt collectors). With Invoice Discounting the control remains within the business and the cost of funds can be lower than term loan. Used properly the administration burden is reduced and while the Invoice Discounting provider will impose audits on the business these will only be relating to how Invoice Discounting is used. Most of these controls should be in the business anyway. Use of Invoice Discounting is not conveyed to customers. It’s ideal where tight cash flow and business expansion are issues, and used wisely can give rise to business development that is hampered by lack of liquid cash.


Text: Donal Dempsey –