Cash flow programs should be embedded in business
Everyone who professes to be serious about wanting to stay in business readily acknowledges that cash is king. Yet far too many business operators give mere lip service to this fundamental proposition on which business survival depends.
They’ll say they’re working to a business plan when there’s no cash flow program embedded in it, which means of course that it isn’t a business plan at all.
And given that taxes are one of only two certainties in life (the other being death) a cash flow program is therefore worthless that doesn’t accommodate timely payment of taxes, essential for a business’s survival.
Because the ATO is taking a less liberal attitude towards businesses that don’t fulfil tax obligations, and as this failure by directors has become an increasing cause of companies going into administration or liquidation, it’s particularly important that business operators master cash flow management.
Despite this being the topic of countless articles, too many business executives are letting this vital target drift off their radar. If you’re a business adviser or operator, then here are some tips for refocusing, together with some possibly unfamiliar perspectives that will help you reestablish cash flow management as a priority.
It’s all about resolve
It’s an operator’s lack of resolve – rather than ignorance -- that’s at the root of many a business’s troubles. It ‘s far too easy to spend what’s in the bank, ignoring the necessity to pay BAS and an assortment of tax bills.
Scores of viable businesses often run by talented and in many respects very capable people, go to the wall daily throughout Australia because money spent or owed exceeds money earned.
Furthermore, money critical for survival of the business, hasn’t been set aside for timely tax payments to the ATO -- debts for which, in a variety of circumstances, directors may be held personally responsible.
But this is a problem that can be eliminated by a special bank account maintained separately from the business’s main operating account. Directors who are firm in their resolve that 20% to 30% of each invoice will be paid into this special account – that is whatever is necessary to cover forthcoming GST, PAYG withholding tax, superannuation guarantee and other taxes – will thus assuredly avoid a potential mountain of trouble.
Understanding cash flow and constantly updating realistic forecasts will go a long way towards lessening the stress of running a business.
Keep this checklist handy
While providing for timely essential payments (including taxes), business owners should also ensure everything on the following check list is operative and constantly updated.
- Reduce debtor days
A business with a $10m annual turnover that reduces debtor days from 60 to 55 improves cash flow by more than $135,000. What could be the corresponding benefit for your business?
Improving paperwork isn’t rocket science. Ensure invoices show all relevant information (including perhaps incentives) to encourage customers to make prompt payments. Written and verbal reminders should be part of a disciplined debt recovery system that incorporates negotiation where necessary.
- Invoice on the spot
Many SMEs get caught up in protracted dramas because they send out invoices at the end of the month. Failing to walk away from a completed job without issuing an invoice can be your first step towards financial stress. Many business owners who issue on-the-spot invoices tell us they get paid that same day.
- Don’t be your customers’ banker
If you don’t believe you can expect payment immediately after completing a job, what do you expect? Don’t let customers dictate payment terms. You may have noticed a trend in current economic circumstances for large businesses to extend payments to as much as 90 days. Does your cash flow program provide for this?
Before you decide to extend a customer’s payment time – which in effect is the time you’re allowing the customer to use money you’re owed – be sure as you can it would be good business. It possibly could be if you’re sure the customer’s business is worth attempting to retain -- in other words that the risk of any disruption to your business’s cash flow for the customer’s convenience is worthwhile.
Always make sure all new customers understand your trading conditions, and have no doubt you’re serious about them.
- Consider your own accounts payable options
Examine options that will best balance timely payment of your bills (so important in retaining your and your business’s credibility) against the need to maintain a viable cash flow. These options may exist outside a secured finance arrangement.
Many SMEs use personal and corporate credit cards for travel and entertainment with large, unused credit limits. In your case, could use of such money be timed to pay your creditors in such a way that you’d have interest free use of banks’ money for 55 days? But remember credit cards can be good servants but bad masters!
- Don’t let stock levels restrict cash flow
Good management of stock levels helps maintain healthy cash flow by reducing working capital required to fund trading cycles.
For example, by reducing the size of orders from suppliers and ordering more frequently, you’ll have less money sitting on shelves at any one time doing nothing.
Can you rationalise your product range? Would fewer items held on your premises still provide customers with an adequate appreciation of the full range you can offer them, especially when aided by ready-to-hand information (DVD displays or brochures for example)?
You should aim to maintain an inventory of a size that meets high demand for quick selling items and from which slow moving/obsolete/damaged goods can be culled in special sales.
A useful article on cash flow management can be found on the Macks Advisory web site https://www.macksadvisory.com.au. Enter Useful Tips in the search engine to locate Useful tips on cash flow.
For more information, contact Macks Advisory on 08 8231 3323 or visit our office on Level 8 West Wing, 50 Grenfell Street, Adelaide SA 5000.
- Invoice on the spot
