Practical considerations of cash flow

Like most aspects of accounting there is a plethora of theory regarding business cash flow. However advice on the practical application of this theory is what businesses are generally seeking.

We understand that as part of the business cycle, a given business will have profitable trading periods followed by periods of difficult trading.

The challenge for business proprietors is to enjoy the good times but not lose sight of the inevitable tougher times.

The important strategy to be followed is to use the profitable times to position their business in the best way to ‘ride out’ the lean times when they eventually arrive.

My advice to business proprietors is to undertake the following:

• Reduce debt
• Invest in any necessary capital improvements
• Invest in developing business strategies that increase market share and improve goodwill
• Provide for tax
• Avoid making financial commitments on the strength of current performance

What not to do:

• Take excessive drawings
• Borrow excessively on the assumption that cash flow will remain strong
• Invest in luxuries
• Enter inflexible tax minimisation arrangements
• Invest in speculative but “high return” investments
• Ignore needs to develop new products, services and work place changes to accommodate changes in the market place and in market demand

Many founders of now prominent companies lived modestly, even after their companies became successful. Real wealth comes from acquiring, managing, owning and selling at the right time when a business has strong fundamentals and a proven track record of success.

Macks Advisory is a firm that practices exclusively in the areas of insolvency and business reconstruction and members with queries are invited to contact Peter Macks on 08 8231 3323 or by emailing pmacks@macksadvisory.com.au.