How not to have cashflow problems

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Estimated reading time: 6 minutes

how not to have cashflow problems
Photography: iakovenko – 123RF

Cashflow remains the main reason why so many businesses fail, which is why knowing your numbers and having the right strategies in place is imperative for success. By John Burfitt

While much emphasis is placed on the expertise of the veterinary team, professional standards of the clinic service and clever marketing initiatives in the quest for business success, there remains an overriding reason why so many businesses fail. And that’s cashflow.

“The main reason businesses go broke is because, despite what kind of a bank balance they start with, they eventually run out of cash,” Delta Business Coaching’s Paul Roach, who has written about the topic in his book Smarter Business Stronger Cashflow, declares.

“The problem I see again and again is few businesses plan for future cashflow. That’s when they hit big problems because they don’t think ahead, until it’s too late.”

A study by U.S. Bank found 82 per cent of businesses fail due to cashflow management, with 78 per cent lacking a solid business plan and 73 per cent being overly optimistic about required funds.

According to international certification organisation Corporate Finance Institute, cashflow is defined as, ‘the increase or decrease in the amount of money a business, institution, or individual has. The term is used to describe the amount of cash (currency) that is generated or consumed in a given time period.’

In his book, Smarter Business Stronger Cashflow, Paul Roach describes the simple changes and strategies that can turn around a business struggling to make ends meet. It identifies key business drivers that can have a significant impact on cashflow numbers and highlights why close monitoring is so essential.

The main reason businesses go broke is because, despite what kind of a bank balance they start with, they eventually run out of cash. The problem I see again and again is few businesses plan for future cashflow.

Paul Roach, author, Smarter Business Stronger Cashflow

“In business, so many people talk about revenue and profit, but it’s about how much unallocated cash there is in your bank account that gives you the pathway forward,” Roach explains. “You must know what has to be allocated for other purposes, like tax and superannuation, and it’s what’s available after those things have been taken out that counts.”

Nick Ellingsen, director of Perth’s Accumulate Accountants + Business Advisors, believes education about financial matters is often the problem for businesses struggling with cashflow.

“Many small business owners, like some of the vets I’ve worked with, go into their new enterprise without understanding the financial fundamentals or how the tax system works,” he says. “There are a lot of business owners who live in the present when things are going well, but don’t forecast for cashflow into the future and then get caught months later when things go quiet. That can be avoided, but it takes some planning.”

Work to a business plan

“Only about one per cent of business owners I’ve worked with have an active business plan,” Roach says. “They stumble along, hoping for the best, but a clear approach to cashflow must be a core detail outlined in a business plan.”

A comprehensive business plan should cover such areas as operational design, strategy and implementation, marketing, financial outline, projections, and define targets and goals.

“It’s never too late to create a business plan, and you should never stop planning,” Ellingsen adds. “That plan you did five years ago will be different to the plan you need for the coming five years, so don’t be afraid to update it.”

Know your figures

Keeping a close eye on the financial statements and ensuring they’re current is an essential to understand the current cashflow position, Ellingsen says.

There are a lot of business owners who live in the present when things are going well, but don’t forecast for cashflow into the future and then get caught months later when things go quiet. That can be avoided, but it takes some planning.

Nick Ellingsen, director, Accumulate Accountants + Business Advisors

“Small business owners are inherently not the best at keeping records, simply because they often have too many competing priorities,” he says. “If you don’t have accurate, up-to-date records and don’t know your position as of today, you can’t plan strategies to cope with what’s coming up,” he says.

Being fully informed about current financial statements also highlights what debts needs to be paid in the months ahead.

“Focusing on cashflow will also let you know whether or not it’s the right time to invest in new capital,” Roach adds. “It also might determine if you pay with cash or look into financing options that will make payments easier.”

Calculate your tax

“The number one entity that puts businesses into receivership is the Australian Taxation Office, as so many businesses do not factor in paying their taxes,” Roach says,

He recommends business owners learn how to calculate the tax they need to pay each quarter, and then put those amounts either put into a separate bank account or directly into their ATO account along the way to avoid shocks later on.

“So few businesses plan for their tax bills and superannuation, and that is what I’ve seen the ATO cracking down on in recent times,” he says. “Once you get your tax under full control is when you can plan far better for your cashflow.”

Get paid quickly

Rules need to be clear with clients about payment options, so that the cash-to-cash cycle—the time between doing the work and being paid for it—is as tight as possible.

We get tempted to spend the money when we see big amounts in the accounts, but instead work to accumulate enough cash, so you can survive six months with zero revenue.

Paul Roach, author, Smarter Business Stronger Cashflow

“This is about getting paid quickly and not letting accounts blow out, or invoicing clients in a timely manner,” Ellingsen says.

“It’s up to you to keep tight control of your debtors and invoicing practices, so after you finish a consultation, invoice on the spot so the payment is done. Make that a clear rule about the way you do business so your clients understand the process.”

Build a nest egg

When times are good is when to aim to set aside some cash in order to build up company reserves.

“We get tempted to spend the money when we see big amounts in the accounts, but instead work to accumulate enough cash, so you can survive six months with zero revenue,” Roach says.

“My clients who went into the COVID-19 shutdown with good cash reserves suffered significantly less stress than those living day-to-day.”

Roach admits while it can take time to build up such a cash reserve, it’s worth it. “Again, it’s all about planning—and that might be what keeps your doors open down the track.”

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