If Cash is the King, Cashflow is the Queen

If Cash is the King, Cashflow is the Queen

This article was written by guest author Arpana Patel, Avenue Solutions Tax & Accounting

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Gone were the days when businesses were operating cash on hand, and now the modern world has bought a new way of receiving cash through direct debits and credit cards. No matter what you call it, at the end of the day you are rich if your bank balance is healthy. The terminology of Cash is the king, still reflects the beliefs of the olden society that no matter what, cash is still the asset of a business.

What is Cashflow?

Cashflow is the flow of money coming in versus money going out. Pretty easy right! Then why is it 80% of small businesses in Australia are forced to shut down businesses due to cashflow problems.

If you have more cash going out than you have coming in – that is where your problem lies. The common complaints we hear from our clients is “Cash is always tight”. Cash is scarce like water, if not managed properly, there is only limited amount to go around.

Is managing Cashflow a nightmare?

Believe me when I say I have lived this nightmare myself. Even though being an accountant, to my surprise, I also had to tackle the challenges of cashflow sometimes on daily basis.

It does not mean that you are bad at business, it just means that there is an obstacle that you need to try and tackle.

Recently, I applied for a bank overdraft facility to manage my cashflow obstacles. To my amusement, the application was rejected based on ability of repayment. The ego in me questioned the bank manager for the reasons of rejection. To cut the long story short, despite having such a good turnover and net profit, if the cash doesn’t flow in the business, my net worth is nothing. The banks still determine your cashflow as the indicator of loans and not the balance sheet which has high debtor balance sitting ideally.

So, the morale of the story is Cash is still the most important factor of life and business. Liquidity in business is very important and having assets that could turn into cash quickly are the ones you want to focus on when you are faced with cashflow crisis.

The Most Common Myth around Cashflow : Profit equals Cash. (making vs receiving)

Let me be very clear in pointing out that Profit never equals Cash. There is a difference between making money and managing money. You can achieve a high sales target but if the money is not received in due course, then it can potentially cause cashflow issues. Therefore, forecasting and budgeting tools are important to know when money is coming in and the times it will need to flow out.

Factors to consider in Cashflow :-

1) Debtor Management (the money coming in)

Simone from Tiny tutus in 2019 AusMumpreneur conference pointed out how important is to understand your Cashflow Cycling. If the money doesn’t come in before it has to go out, then this could pose a major challenge for the cashflow management. If the debtors are too high on the balance sheet, that indicates that money is tied down and you need to put some strategies in place to reduce the debtor balance.

As a real example, recently we changed our terms of payment from 30 days to 14 days from date of invoice. We noticed that on a 30-day term, the client’s payment turnaround was 45-50 days which was causing issues when paying rent and other business expenses. Most businesses nowadays offer early discounts and repayment concessions. So chose a strategy that works best for your business.

2) Creditor Management (the money going out)

We almost always see that bills comes faster than money. My tip is don’t pay before it is due, and if really struggling only pay when you cannot push beyond the limit. Also speak with your creditors, let them know the situation and request to push the limit a little bit.

If you are in a product market especially in product manufacturing and/or distribution from overseas, the biggest hurdle is trying to find a balance between paying your suppliers versus receiving the money from the customers. The time lapse between the two could be a juggling act of cashflow where money must be invested before you see the end results. In this case, try and find funding from investors if possible or get a bank overdraft facility to ease some pressure off. Nowadays the market is full of credit providers who can provide funds such as line of credit, unsecured business loans (the rates are high) or Debtor Finance which will all come at a cost to the business so evaluate your options properly.

The key to finding the right fit between money coming in and going out is negotiating the terms of credit with suppliers. If you know your debtors are paying around 30 days, then negotiate supplier terms at 45 days.

A great example of supplier negotiation is Coles and Woolworths, regardless what your terms are, they will only pay you after 60 days according to the rules. Now this is easy for them as they dominate the market, but for small businesses it would be impossible to dictate your own terms. Therefore, the focus should be more on turnover of debtors than creditors.

3) Stock/Inventory Management (money in transit)

More than half of the time we see clients holding more stock than needed. If your stock is perishable, get the timing process right from manufacturing to freight to customer.

The higher the stock balance the more money is sitting in your warehouse doing nothing so watch out for the unused stock. If some of your stock is not selling or is absolute, take it out at a cost price or lower. It’s better to cut your losses early and salvage some money than having no dollars.

4) Minimise Expenses (reduce wastage)

Don’t spend if not needed. Analysing your expenses with a magnifying glass may be needed if you are making a loss in your business. You cannot control the sales, but you can monitor the expenses. Check how much you are spending on each item and see if you can source it better or importantly outsource the whole task.

This is a very common discussion I usually have with my clients who are surprised that they did not make a profit despite sales reaching the heights. The reason I advise clients to reflect on the P&L every month so that you understand the outgoings of the business. Nowadays it is easy to spend money with plastic cards, but when you see the cost to the business that is the biggest eye opener.

Go through your expenses on the P&L and think whether the cost is necessary for the business or you could do without. The important items to watch out is your advertising, promotion and Marketing spend. Small businesses are spending way too much on Marketing without checking the ROI and this could be more of a wastage than income generation tool.

Understand your cost of sales, the cost to you to produce/distribute the goods. Are there better suppliers who can provide the same input as your current supplier but with better prices? Some of my clients have also changed the logistic companies and sourced better ones that would fulfill the business goals.

There is always someone doing better than the other, find those sources and create a good long-term working relationship with them. You usually have no control over your sales, but you have 100% control over your expenses so before spending, think and check.

5) Resale of Assets (use it or lose it)

Liquidity in business is very important and the most liquid assets are debtors and stock if managed properly. When we move houses, we are amazed how many things we have accumulated throughout the years and now know that half of the things are unnecessary. The result is either we donate, sell it on eBay or have a garage sale. Same concept applies to assets of business.

Recently, I had a discussion with a client to sell some of the motor vehicles that are now not needed because the sub-contractors are delivering the products. He was reluctant to sell, firstly because he was emotionally attached to them and secondly, he didn’t think it would have any resell value. An asset sitting vacantly was costing him $5000 a year in registration and maintenance that was unnecessary to the business as the asset was not generating any income.

When making business decisions, always keep emotions out so that clarity can prevail. If an asset is ideal and occupying the space, and no longer doing its job, sell it. The common assets to look out for is machinery, equipment and motor vehicles.

Conclusion

Understanding the flow of money will assist you better in making business decisions.


About our Guest Author

Arpana Patel is a Melbourne based accountant providing tax and business coaching services to small businesses/startups around Australia. She is a single mum who ventured her business with minimum capital and maximum challenges. With a lot of passion and determination and without any family support in Australia, Arpana created her own small accounting practice to assist mainly small business owners through her own experience of running a small business. Arpana’s expertise are tax planning, investment strategies and wealth creation along with tax compliance and Financial coaching. To get in touch, please visit Arpana’s website and Facebook page.