Published on Dynamic Business Wednesday 21 September 2010
A lack of sufficient cash flow is currently a significant issue for SMBs across Australia, with recent statistics indicating it as a factor behind the collapse of small businesses. Cash flow shortages lead to a number of other issues, including businesses struggling to pay creditors, employees and business owners.
However, simply preparing monthly cash flow projections is only one of the things a business owner can do to put their business on a steady cash flow footing, according to Managing Partner of Brisbane Accountancy firm, elliotts, Matthew Schlyder.
“What many business owners fail to recognise is that Profit and Loss Statements and Balance Sheets prepared from their internal accounting program focus on book profit, not cash. Whilst it is vital to focus on the business’ profits and asset position, it is also important to understand the flow of cash in and out of the bank account,” Mr Schlyder said.
“Sometimes a very profitable business can have poor cash flow, particularly if customers take a while to pay and a business needs to pay suppliers quickly. Also, businesses experiencing high growth can suffer from cash flow problems because there can be a lag, as sales grow and then the cash comes in,” Mr Schlyder added.
Good cash flow improvement formula aim to drive debtors down, drive stock holdings down and maintain creditors at terms. By doing so surplus cash exists to make asset purchases, pay debts, and pay dividends and drawings to owners.
Cash flow projections should also be prepared for one to five years as a minimum, depending on the business’ needs, adds Mr Schlyder.
“I would also advise businesses set their credit terms for customers carefully and ensure that they follow up with customers if they exceed these terms. By the same token, pay your creditors on time, taking advantage of their credit terms and any discounts offered for early payment,” Mr Schlyder said.