Guest Post: Your Cash Flow Problem May Not Be a Cash Flow Problem
(Note: We are privileged to have our colleague and good friend, Matt Hunt, on board as he shares his valuable inputs on how business owners address their cash flow problems. Thanks Matt for taking the time to put this together!)
As an accountant and advisor to a lot of small business owners, if I had a $1 for every time a small business owner told me cash flow was tight, well I’d have a lot of $1’s.
If you have or ever had cash flow problems, I think you’ll find the cause/s to that symptom below.
1. You started the business off the smell of an oily rag
Businesses need working capital to grow.
Businesses who make it through the startup phase that go on to hire more staff, buy more equipment and take that lease need access to cash to function.
Cash to make your weekly payroll whilst you wait for your customer to pay you 30 days end of month. Cash to keep paying the bills if a customer pays you late, or ends up being a bad debt.
Problem is, businesses who start without sufficient cash injection and achieve growth are destined to have a cash flow squeeze.
The solution for some is getting the support of a bank (overdraft, Line of credit), but for many ends up being:
- Accrue ATO debt
- Have to sacrifice their own fair remuneration which puts stress on the household finances
- Having suppliers sit well outside their terms
- Expensive sources of debt (credit card, online lenders)
- Develop a relationship with a bank manager / broker that understands your holistic financial position
- Work with an accountant who can help you understand what your business needs to function effectively in terms of working capital
- Have a rolling cash flow forecast that helps you see the bumps in the road that may be coming so you can plan / pivot
2. It’s not a cash flow problem, it’s a profitability problem
For a business to have sustainable cash flow, it needs to be profitable.
Determining if a small business is profitable can be challenging for a number of reasons:
- Accuracy of the accounting records (not up to date, not using accrual accounting, no stock movement)
- Costs of a personal nature of the business owners are included for ‘tax’
- Owners market remuneration not shown as an expense (may be a dividend / loan on the balance sheet)
See the problem. If you need to know you are profitable to make sure you give yourself a chance of being cash flow positive and you can’t rely on your numbers, you are flying blind.
- Invest in a quality bookkeeper who can get you on the right systems and put in place processes so you can timely and accurate management reports
- Look at your management reports, at a minimum each month look at P&L vs. budget, Cash flow and a balance sheet. If you don’t feel confident with these, get the support of your bookkeeper or accountant to explain how each report works.
- Ask questions of your bookkeeper about things that stand out on the report (this looks high, why is that there, how come this looks very different to last month). Simple questions and observations can lead you to identifying an issue you can look into and do something different in the future.
- Talk to your accountant and ask her, if she were running your business what things would she keep an eye on to make sure each day / week the business was going in the right direction (could be daily sales, chargeable hours, foot traffic, quotes submitted, number of times the phone rang).
3. It could actually be a cash flow issue
For me a cash flow issue is experiencing an inability to pay your bills when they are due when you are profitable and you have access to working capital.
This is generally only triggered by one of 3 things:
- Debtors; customers are paying you outside of terms, and slower than they have in the past
- Creditors; you are paying creditors inside of terms (or their terms have been reduced)
- Stock / Work in Progress has increased beyond the rate of revenue growth (i.e. you are carrying more weeks / months worth of stock than you used to, or if you are in service industry, you are not invoicing your time as quickly as you used to).
So there you have it, some of the most common causes of tight cash flow in a business.
There is incredible power in truly understanding the cause of a problem, and like health, once you know what it is you can set out about finding a cure.
Our business purpose is to support SME business owners run a better business and pay less tax because we understand that for the owner the business is their identity and a massive part of their life.