Practical steps to manage cashflow challenges for Irish SME's

Cashflow management is arguably one of the most pressing matters for Irish SMEs today. 38% of respondents note that they are experiencing short to medium-term cashflow issues with 28% “firefighting” in their business. So, what are the main risks to cashflow and how can you mitigate those risks?

1. Receivable days management is crucial to any business. Extended periods of credit lead to cashflow pressure. The reality is that 16% of respondents have significant concerns over bad debts. Enforcement of terms and a potential credit insurance policy can mitigate this risk.

2. Poor planning is often at the centre of cashflow management issues. Invest time and resources into budgeting and reviewing actual results. This is crucial to the ongoing success of a business.

3. Stock management has a direct correlation to cashflow resources. 21% have concerns over their stock levels increasing due to outside pressures. Stock management will not only benefit cashflow, but it will mitigate the risk of obsolete stock.

4. Pricing concerns have grown over the past 12 months, with 81% of businesses' input costs having increased. In the absence of a pricing model, a business may fail to reflect these increases in its pricing e.g., the service department of an agri-equipment business will have experienced increased employment, fuel and maintenance costs. With no pricing model in place, these costs are not being reflected in service contracts with their customers.

5. Foreign exchange adds an additional dynamic to cashflow management. Many Irish businesses now exporting abroad have adopted an “invoice in euro, pay in euro” policy to mitigate this.

6. Supplier issues can have a detrimental effect on a business. Without a solid supply chain, there is an increased risk of delayed or cancelled orders which ultimately results in decreased revenue receipts. Maintaining strong communication links with suppliers can mitigate this risk and reduce holding excess stock.

7. Overheads should not be overlooked. The reality is that many Irish businesses are overpaying for utilities e.g., a food production facility consumed a large volume of units in one year and the tariff was over 30c a unit more than another provider. The negative impact on this business was more than €50,000 in just one year.

8. VAT & PAYE are a cashflow struggle for many businesses. To mitigate the risk of large tax liabilities arising bi-monthly, many Irish businesses now have a monthly debit instruction with Revenue. It offers more certainty from a cashflow planning point of view.

9. Employment costs are ever pressing for businesses. Rises in hourly rates combined with the impending Auto-Enrolment obligations have a significant impact on a business. It is important that a pricing model exists to fully encapsulate true costs, pricing and margins.

Top tips for businesses

Stocktaking

Some businesses view stocktaking as a burden. However, not only does it help gain a true picture of the profitability of your business, it also identifies:

1. Excess stock holding.

2. Errors in your ordering processes.

3. Stock loss or potential theft issues.

4. Storage issues.

5. Obsolete stock issues.

An agrifood client recently carried out stock checks and discovered that a considerable amount of food products had not been dispatched in the correct date order. Had the stock control checks not been carried out, this stock could have become obsolete and cost the business thousands of euros.

Employment costs

It can often be difficult to calculate employment costs and assign them in a business. Whilst a business is aware of the gross salary of an employee, it is sometimes difficult to consider employer’s PRSI, annual leave and bank holidays in assessing the true employment cost per day.

Take for example, Joe, who works 40 hours per week and has 20 days holidays as well as 10 bank holidays. His salary is €40,000 per annum. The reality is that Joe works 230 of the 260 working days in a year. The real cost for each day that Joe works is:

€40,000 + Employers PRSI = €44,420. This equates to €193.13 per day/ €24.14 per hour that Joe works. This is considerably more accurate in terms of allocating costs than the €19.23 per hour gross salary.

Pricing model

A product or service pricing model is necessary for a business to truly understand the costs and margins of their business. It looks at not only the input costs, but also the value you are adding for your customers.

Create a dynamic pricing model that develops along with your business. It should encapsulate all input costs and overheads and provide you with clarity on your margins. For more information on how you can develop your pricing model, contact our ifac advisory team.

KPI dashboard

Businesses have access to a large amount of data. It can be difficult to analyse the data, assess the key metrics driving their business and identify where opportunities for improvement lie.

Identify the KPIs appropriate to your business to analyse performance. Creating a dynamic KPI dashboard provides real-time insights and facilitates quick decision-making. This can allow businesses to identify and address issues before they escalate. The dashboard makes difficult to read data accessible and understandable to all of the senior management team.

This story was first published in our 2024 Food & Agribusiness Report.