Monitoring Your Business - Why Cash Is King

Business owners who have successfully navigated through recessions of the past know just how important cashflow is. While making a profit is important to make a business sustainable, cash flow is just as important. Without it a business will eventually be unable to operate. Below are a few reminders on what to monitor.

Understand your Cashflow - do you know how much in costs the business will be required to pay over the next 30, 60 and 90 days including payables, loans, GST, income tax. Are you confident you will have the funds when needed? Growth businesses will have additional cashflow pressures (see our September 2016 newsletter).

Understand your Profits - how much profit does your business generate per month? Is this enough to cover payables, loan and hire purchase payments? What parts of the business are most profitable (both as a $ or %)? Can you invest more time into areas that provide improved profit?

Accounts Receivable – is there a system to ensure that invoices are paid on time? Depending on your business you may have terms that require payment within 7, 14 or 30 days. Ensure you have a system to follow up non-payment the next 1or 2 days after payment is due. The squeaky wheel gets oiled. If you follow-up to get paid this will hopefully get your business to the top of the payments list.

Closely Monitor your Drawings – if the monthly drawings/wages that owners are taking out of the business is higher than the monthly profit the business will soon have cash flow problems. This may be particularly relevant when profits have decreased but the owner is still taking a high level of drawings or wages out of the business.

Stock Control - Stock on Hand is effectively cash not sitting in the bank. Are there good controls over stock purchases so that you are not over stocked? Unnecessary funds tied up in stock would otherwise be sitting in the bank account.

Review the Information – Do you have relevant information to assess your business on a regular basis to confirm if you are on track with expectations? While it’s okay to be thinking ”business is going okay” or “business seems to have slowed up” what are the facts?
We assist a number of our clients to get relevant reports and information from their accounting system to keep them informed on how business is progressing. Contact us if you require assistance with this.

Heed the Warning Signs – there can be many signs that cash flow is becoming a problem including; funds are not available to pay accounts payable on time, it is taking a longer period to pay all payables off, costs are being put onto a credit card and it is not being paid off, trouble meeting loan, GST, PAYE or tax payments as they fall due. Taking action in the early stages can avoid future grief down the track.

Take Responsibility – if anything requires action take action!