| Cash is King! How to Optimise Cash & wealth |
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One of the main reasons that businesses fail is their inability to meet their financial obligations when they become due as they have run out of cash. Knowing how to maintain a healthy cash flow is essential to a successful business. Cash cycles through the business, from sales, to debtors, cash in the bank, then purchases create creditors and cash flows from the bank. A healthy flow of cash can decrease the amount of capital required and increase profitability by reducing interest expenses. It can also help you to generate income on surplus funds so the business can expand and grow. Why worry about cash flow management? While failure to generate profits is critical to a business, it is only one cause of business failure. Profits don't guarantee positive cash flow. That is, profit does not equal cash! The immediate continued operation of a business is at risk of insolvency if it does not have the cash to finance working capital needs. Measuring the movement of money in and out of your business allows you to monitor your position and set in place strategies to deal with shortages and surpluses. Timing of cash inflows and outflows is the basis of cash flow management. That is, making sure there are sufficient funds to pay essential payments such as wages and salaries, suppliers' payments and taxes when they fall due. Yet, surprisingly many small businesses don't have a cash flow plan, or if they do prepare one, it is rarely updated to reflect changing circumstances. Improving cash management Generally, cash flow can be improved by cutting costs, increasing turnover or by speeding up cash inflows and delaying outflows. Some examples of ways to improve your businesses' performance include:
Getting the most out of your surplus The other side of cash flow management deals with how you handle your surpluses. Cash surpluses should be put to work, by either investing the surplus or using it to repay debt. It is usually a good policy to repay debt before considering alternatives, as debt usually attracts a higher interest rate than investments. However, this decision should be considered in the context of future cash needs and business strategies. As your business grows, so does your need for cash. You can use internally generated funds to expand and reduce interest charges. Cash flow planning A cash flow budget is a projection of your business' cash inflows and outflows over a period of time. Preparing a cash flow budget:
Your cash flow budget should be prepared on a month-to-month basis. Unlike business plans and operating budgets, which are a mix of forecasting and goal setting, cash projections are strictly forecasts although they are usually based on past experiences. The purpose is to anticipate cash needs, not to set targets for performance. These should be conservative, as the impact of a cash crisis can be severe. Update forecasts if they become outdated. Accounting for your tax obligations Every business should ensure its cash management strategies take account of tax obligations. If you use cash management strategies take account of tax obligations. If you use cash accounting for GST, the impact on cash flow will be minimal. However, businesses using accrual accounting may be required to pay GST before they have received the money, therefore they need careful planning. Businesses should plan to retain sufficient cash to pay the tax office when commitments fall due. With PAYG they can plan for tax instalments and manage their cash flow. Putting cash into a separate account to cover all tax commitments may be a wise move, as some businesses have failed through poor management of their tax obligations. At the very least, failure to pay tax, including GST, on time may result in penalties. At Advantage One we have developed a 'Your Advantage' health check process which will help you identify areas for improvement. Contact Tony Martin - Director |
+ 61 8 8333 1944
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