Cashflow Management

Cashflow management in action

The following simple example shows how a small, profitable business can run into unforeseen cashflow problems when it takes on a new large order.

XYZ manufacturer is a small but profitable resin gift designer and supplier with three full-time staff (including the two owners). It outsources production, but supplies the raw materials itself to save on costs. It then finishes and packages the final product on site.

XYZ does not have any loans or overdrafts. It has a long-term customer base of small gift shops and visitor centres.

XYZ suddenly wins a large order to supply bespoke wall plaques for a chain of stores. The contract promises to double its turnover.

The team takes on an additional employee and works flat out to meet the deadlines. It doesn’t notice an impending cashflow crisis resulting from a fall in repeat orders from existing customers combined with a jump in raw material costs.

To make matters worse, the new client keeps changing its mind about designs. A misunderstanding means the first run of goods is rejected, causing a delay in payment and increased production costs. XYZ orders additional materials to make up the shortfall in the run.

By the time the order is complete, XYZ is running an expensive overdraft. Profit margins have been squeezed to the limit and it has lost several of its existing customers. A downturn in the fortunes of the retail chain means that it doesn’t place any further orders.

After a lot of hard work, XYZ finds itself back where it was five years earlier.

Tighter cashflow management would have highlighted the fall in repeat orders and rise in raw material costs. XYZ would also have benefited from a client contract that included:

  • milestone payments and penalty provisions for changes such as those to designs – eg increased fees
  • sharing the cost of additional materials with the new client or getting the client to pay for them

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