One of the most important aspects of running a business is to ensure you have adequate cash flow to meet all of your financial obligations. Cash is the lifeblood of your business and ensures you stay afloat. Once you are securely afloat, you can then sail towards your destination. (Maybe with a nice refreshment in hand and the people you care about sitting beside you.)
Unfortunately, most business owners tend to focus on profits rather than cash flow, and this is where most cash flow problems begin.
Put simply, there are two sides to your cash flow:
1. Money you receive from your clients for work performed.
2. Money you pay out to workers, suppliers, the ATO and others.
One of the biggest killers to your business cash flow is slow paying customers. It is great to have lots of customers, however, if they are not paying you on time (or at all), that will make it very difficult for you to pay your bills. Your employees, subcontractors and suppliers must all be paid on time, but if your customers aren’t paying you, where is the money going to come from?
The second silent killer is your commitments to the ATO. Depending on the size of your business, you will have to pay the ATO for your GST and PAYG obligations either monthly or quarterly. Many business owners still continue to overlook this critical obligation. Whether that is because they don’t want to admit they owe anything to the ATO or simply over commit their funds elsewhere, this is a problem. After your workers, the ATO should be your top financial priority. It is one organisation that you do not want to get on the wrong side of.
The third silent killer is over committing expenditure. The way you manage your stock of materials is important. The vast majority of material supplies are readily available and therefore there should be no reason to buy extra ‘just in case’. The same goes for equipment. While we tend to want to have every piece of equipment that we could possibly ever need, that is not a sensible approach, particularly if there are certain items that would just end up sitting in the warehouse gathering dust. In addition to that, we tend to want the best of everything, and sometimes just because ‘the other guys have one’. Neither of these are smart business decisions.
It is possible to be making a profit, yet still experiencing cash flow problems. A simple example is when you are generating sales, which increase your profits, but you are not collecting the money and therefore your sales revenue is not the same as your cash inflow. It goes without saying that it’s no good completing a job if you don’t actually receive the money for it.
Having said that, I am sure you do receive the money at some point in time, but the timing of the receipt is very important. Why? As I discussed last chapter, you have financial commitments to make to the ATO, not to mention to your employees, contractors, suppliers and so on. If you are not collecting sales receipts on your agreed terms, then you will find it difficult to meet those commitments and you could potentially find yourself in severe financial difficulty.
Simply, making more money will not solve your problems if cash flow management is the problem. So it’s important to establish strategies to make sure that you have enough cash in the business to operate on a day-to-day basis without facing any sort of cash crisis.
http://adpartners.com.au/wp-content/uploads/2017/08/logo.png00adminhttp://adpartners.com.au/wp-content/uploads/2017/08/logo.pngadmin2017-08-26 04:53:002017-10-24 05:14:37Managing your cashflow is critical
Established in 2001, AD Partners is a boutique public practice Accountancy and Business Consulting firm situated in heart of Carlton, Melbourne.
We service all areas of Melbourne, and offer personalised service to business owners no matter how big or small.