The 4th Step in Business Mastery…..Systems

Systems

‘Step by step and the thing is done.’ – Charles Atlas

Good financial systems need to be in place to help you manage your business. They will assist in monitoring your financial situation as you move towards your goals, they will ensure you have enough money in the bank to meet your expenses, and will keep you on top of your statutory requirements.

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. 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.

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. 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. 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.

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.

One benefit of both reviewing your historical cash flow patterns, as well as creating a cash flow forecast, is being able to make changes that will maximise your working capital.

Working capital is the money you have available to operate your business from day to day. In the building industry, working capital is made up of three key components:

• Payment to suppliers (creditors)
• Work in progress
• Collection from customers (debtors)

How much working capital you have at any one time is dependent on the length of time between you using your cash to purchase materials and pay your labour, and receiving payment for completing a job.

Clearly, there will always be a delay between these two steps. Problems arise when you are unable to meet your financial obligations because you are still waiting for payment.
When you are working on a project that is larger than usual, and you know there will be a substantial delay before you finally get paid, you will need to plan for that by ensuring you have a larger amount of working capital on hand to tide you over. By contrast, for smaller jobs where turnaround time is quite short, your working capital requirements will be minimal and your cash position will be relatively unaffected.

The real issues occur when delays are unexpected. For example, you may be doing a small renovation for a client and, while you have quoted the job and know how long it will take to complete, there is no way to be sure that the client will pay for it on time. Depending on the size of that job, you may wish to demand an upfront payment to cover the materials you need to pay for before commencing the job.

The key to successful cash management is carefully watching all the steps in the process and planning accordingly. The quicker you can make the cycle turn, the faster you can convert your trading operations back into cash, which means you will have increased liquidity in your business and will be less reliant on cash or extended trading terms from your suppliers.

Fortunately, you can manage your payments to suppliers, your work in progress and your debtors to improve your cash flow.

It is all detailed in my book, http://www.buildit-book.com.au/. Take a look now.

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Tony Dimitriadis