Cashflow Management
JOHN PITITTO, Mead Partners, Chartered Accountants reports on Cashflow Management as per his presentation at the September 2013 CMPA Business Seminar 2.
PROFIT VS. CASH FLOW
It’s a common misconception that success in business is all about profit. The tragedy is that believing this ignores the fact that it’s unwise to imagine yourself raking in the future profits if the business can’t pay its bills in the meantime. The true success of a business comes when you manage the money coming into the business and balance it against the money going out so that there is always sufficient cash to cover what it owes.
Managing your business’s cash fl ow involves monitoring the relationship between cash coming in and cash going out. While a business can look profitable on paper, if the money is not in the bank to pay the wages, for example, then your business is in trouble.
While some outgoings can be put off for a month or two, the day will inevitably come when they have to be accounted for and you need the money to settle these debts.
Failure to do so will reduce even the most successful business to its knees.
CASH FLOW FORECASTS – “PLAN AHEAD”
A cash-flow forecast is a key diagnostic tool for the health of your business. Without one, managing your business’s cash-fl ow effectively is almost impossible.
Small business owners often shy away from putting together a forecast because they find it hard to gauge the affect different factors will have on cash-flow events like the introduction of a new product line,marketing venture or extra staff members. The important thing is to just start doing it.
Three tips for putting together a solid cash-flow forecast:
- Keep it simple: Focus first on the items that affect your cash-flow most heavily and add extras to the forecast if required. The more complex it is, the more likely errors are to occur.
- Standardize: Ensure procedures for collecting and reporting cash-flow data are consistent across the business. This will help you model the cash inflows and outflows and make it easier to understand where your cash is going each month.
- Measure your accuracy: Set the level of variance from your cash-flow targets you are prepared to accept, and see how close you get each month. Where targets are missed, investigate the reasons and consider if changes are needed for next month’s forecast.
WHAT IS THE CASH FLOW CYCLE?
Cash-flow management may become imperative during economic downtimes, but periods of rapid growth can present equally difficult cash-flow challenges.
Working Capital analysis is basically the number of days you hold inventory, day’s debtors take to pay you and finally how many days you take to pay your creditors, in this sample case this business has 67 days of negative cash fl ow from the date they produce the inventory pay their creditors and then get paid by the customer.
Careful cash-flow forecasting can help businesses avoid growth pains by highlighting the need for increased capital expenditure and the imbalance to cash-flow that comes from an increased debtor book.
Talking to your bank can help you get through the cash-flow squeeze that oft en precedes a profit boost, this is where your cash-flow forecasts will become extremely valuable as you will be able to see when the squeeze will come and you will be able to plan accordingly.
DEBTOR DAYS: HOW DO YOU COMPARE?
At the present time, debtors’ days outstanding in Australia are, on average, in excess of 54-days. That’s almost double the 30-day terms of trade that many businesses operate on.
Put another way, it means those businesses allowing 54 plus days on outstanding debts, are operating on almost half the cash-flow that should be flowing into their businesses at any one time.
Many small/medium enterprise operators do not install effective debtors’ management systems. In particular, they do not calculate debtors’ days outstanding on a regular basis. The number of days debtors are outstanding is a very important key performance indicator and is one that business managers should be monitoring, at least, on a monthly basis.
One of the ways I’ve found that debtors’ management can be improved is by using our Biz Impact financial analysis tool.
STOCK MANAGEMENT
When was the last time you reviewed your stock turnover in days?
Stock is cash sitting on the ground. If it takes 21 days to sell that stock and another 60 days for the customer to pay then you are 67 days behind whilst you have had to pay your wages and fuel to produce that product. Th is is a fine line and difficult to control but in times that cash-flow is tight this might be crucial to keeping costs at a manageable level.
DO YOU KNOW YOU’RE WORKING CAPITAL REQUIREMENTS?
- Plan for growth
- Be aware of increased working capital and capital expenditure
- Does growth mean more profit
• Risk vs Reward?
BIZ IMPACT DRIVE YOUR BUSINESS
Our Biz Impact Service is essentially a ‘health check’ of your current and future financial positions. It allows us to diagnose your business and offer recommendations and solutions to potential tax problems, cash-flow and profit issues, whilst maintaining a focus on the overall improvement in financial performance.
What BIZ Impact aims to achieve is to provide the business owner with a clear picture of:
- Where has your business come from?
- Where it is now?
- Where you want it to be and how to get there.
Biz Impact has many functions and review points for the owner but we believe cash-flow control is one of the most important key areas to focus on as this is usually the difference in success or failure of your business.
For further information please contact
John Pititto at Mead Partners on 03 9523 2277
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