Importance of Cashflow for Business Survival
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The document discusses the importance of cash flow and profit and loss statements for business success. It notes that 82% of failed businesses ran out of cash and 70% were profitable. It emphasizes the necessity of positive cash flow for business survival and having accurate and timely management information for decision making. The document provides tips for structuring profit and loss statements and emphasizes developing a cash flow forecast.
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Importance of Cashflow for Business Survival
- 1. Happiness is a Positive Cash Flow
- 5. Heather Smith ANISE Consulting twitter#cashflow
- 6. Heather Smith ANISE Consulting twitter#cashflow
- 7. Heather Smith ANISE Consulting twitter#cashflow
- 10. 82% of businesses that fail fail because of cashflow – they run out of money 70% of them were profitable Heather Smith ANISE Consulting twitter#cashflow
- 11. Heather Smith ANISE Consulting twitter#cashflow
- 13. Heather Smith ANISE Consulting twitter#cashflow Interest Expense Dividends Income Tax Accounts receivable Cash reservoir Cost of goods shipped to customers Inventories and manufacturing expenses Operating Expenses Shipment to customers Accounts receivable
- 15. Heather Smith ANISE Consulting twitter#cashflow
- 21. What do I want you to take away from this session? Heather Smith ANISE Consulting twitter#cashflow
- 24. Q & A Heather Smith ANISE Consulting twitter#cashflow
Notes de l'éditeur
- Does the thought of visiting your accountant make you sick? Does accounting spiel sound like a foreign language? Then this is the session to attend; Heather Smith is here with you to share her love of accounting in a small business environment. Using many practical examples, stories and anecdotes you will gain an insight into: • the importance of accurate and timely management information for business decisions; • the necessity of a positive cashflow for the survival of your business; and • work through the structure of a profit & loss statement to suit your business needs. This session will be supportive, interactive, easy to understand and in plain English, a must attend session if you need to know the basics and have been avoiding the financial side of your business! Follow the session on twitter #cashflow
- Profit and cash are not the same thing Let me tell you about one of my favourite clients, Bankrupt Bronwyn. Bronwyn and her husband worked hard, they both ran their own business, the cash came in and they spent it just as hard as they worked. They were leading a great life, driving prestigious cars, living in a gorgeous house, until overnight their cash flow dried up. They worked longer hours and they worked harder, but it was too late. They lost all the material goods that they had surrounded themselves with. They lost their family home, their businesses and their livelihood. Bronwyn and her husband had mistaken cash for profit. So why is Bronwyn one of my favourite clients? Bronwyn and her husband rebuilt their lives, they started a new business, and the critical difference is that now they have made it their mission to ensure their business accounting records are up-to-date, accurate and they understand what their financial records mean to them. They learnt the hard way that profit does not equal cash and cash does not equal profit, and they are not about to let it happen a second time. So what does this mean? Profit is Business Income less Business Expenses. We all probably have some idea what profit is, we get a set of financial reports and scan through them, and basically the one thing we look at and think we understand is profit. If it is positive, the business has done well and we are happy, and if it is negative the business has done badly and we don’t feel too good. However because of timing differences the profit figure does not equal the balance in your bank account. So what happened to Bankrupt Bronwyn? Her business had cash, but unbeknown to her, her Profit & Loss reports were unhealthy. It was irrelevant that accurate and timely records were not being maintained, because she did not know how to read them anyway, and her bank balance gave her a false sense of security. What could have caused this? The business may have taken out a loan; a loan increases the businesses liability and the business asset cash at bank. This transaction is entirely reflected in the Balance Sheet not in the Profit and Loss reports. Another scenario could be that inventory was running low, and stock was not being reordered. So the cash is coming in, but as it is not being reinvested in stock, future sales dwindle. In Bronwyn’s case the business was simply delaying supplier payments. The cash at bank that they were spending was actually owed to the business creditors. Now at this stage, in case you are wondering the Profit and Loss reports in accounting software do not include GST in any of their figures. However this too could be a factor, over the quarter you are collecting GST on behalf of the ATO, you bank balance is building up, but this is not and will never be reflected in the businesses profit figures. If you as a business owner find yourself a nice sum of cash in the bank, don’t book yourself a holiday to Fiji. Look at your accounting records, is that money needed for GST or Tax payments? Do suppliers or loans need to be paid? Does stock need to be replenished? You need to look at accurate and timely profit and loss reports, as well as other reports, to make financial decisions about your business. Profitability is what I have earnt, cashflow is what I have got in cold hard dollars.
- What Does Return On Investment - ROI Mean? A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio. The return on investment formula: Return on investment is a very popular metric because of its versatility and simplicity. That is, if an investment does not have a positive ROI, or if there are other opportunities with a higher ROI, then the investment should be not be undertaken.
- There has been a lot written about debt collection, and the steps to take, but as a soloist it is so much harder, it is more complicated and it is a lot more personal. You feel almost powerless, and in these turbulent economic times it is only going to get worse. I don’t care what anyone else says collecting money for soloists it is a completely different experience than an account receivable clerk collecting money for a small business. You may find that you form very close bonds with your clients, you see them at the local cinema, your kids play in the same basketball district, you tweet with them on twitter, and then the invoice is sitting in your office with a big neon sign flashing over it saying unpaid. Now what do you do? Let me tell you what Gretel the Graphic Designer did. Gretel was working with me on a large project, budget was pre-approved, and all received invoices were paid. I was happy with her work and referred her on to many business associates. Some months went by, and I received a two page email attacking and cursing every aspect about my professionalism in business and eventually it got to the point to tell me her final invoice was unpaid. Who sends two page emails? So I went thru my email programme and did come across an email from her, from several months ago, with an attachment, which I could not open. She had used a fancy graphics programme to produce the invoice, which would have been fine if I had had the fancy graphics programme reader installed on my machine. I am a busy person, and I filed the email, not knowing what it was and thinking nothing of it. I had every intention of paying the invoice, and did pay the invoice once I got it in a format I could read. So what could Gretel the Graphic designer have done differently? Communicate!! She could have rung me to see; If I had received the invoice, prior to it even being due for payment? If the invoice had been paid or were there any problems with the invoice? Had the invoice been approved for payment yet? She could have sent a follow up email, or a paper copy of the invoice, or email copy of the statement. After spending months building a business relationship, she took it to a place that it could not recover from. Do you think I or my colleagues had dealings with her again? Chasing payments from small businesses is different to chasing payments from large businesses. If you are seeking payment from a large organisation, you need to realise that they will have a process for paying bills. I want you to understand this process, knowledge is power, you will have a better understanding of how to chase for payments if you understand the process. Typically the invoice arrives into the accounts receivable area, they will code it and then it will be sent for payment authorisation, it will come back to accounts receivable department and they will put it in a batch for payment processing. If you are having trouble with payments enquire about who has to authorise the payment, you may find that if an invoice is over a certain dollar value, it needs to go to a higher level for payment authorisation. I have finally convinced a client not to send out monthly invoices in excess of $100 000, they are now sending out weekly invoices around $25 000 and they are now getting paid quicker, because they don’t have to go thru higher levels of management for approval. Now it does not hurt to find out the name of the accounts payable clerk, and be personable with her. Find out the hours she works, when she will take phone calls chasing for money. She will have a lot of clout when it comes to getting your payments processed. As your going thru the billing process, keep a record of everything you do. In MYOB you can do this thru the contact log. This means that you or your bookkeeper or assistant can centralise any notes that you make about the clients payment system. For example:- Invoices are paid on Friday. Calls chasing payment are only taken between 10am and 1pm. The invoice is sitting on Harry’s desk waiting for approval. Clients are slow to pay during the school holidays. This information assists you expediting the process of getting your invoices paid. That makes sense doesn’t it. It is quite simple when I talk about it here isn’t it. But businesses go into administration because of cashflow difficulties. Business owners get very busy working and they overlook the basics of cashflow management. If you are selling a goods or services you need to have terms of agreement in place, which would include payment terms, and you need to give the client an invoice, and you need to follow up to ensure you are paid on your terms. A few years ago, I had a chat about arranging some advertising for my business with Anna. We talked on the phone and exchanged a few emails and ideas, but I got busy and did not hear from her again until a few months later when I received an invoice from her; for advertising. She had assumed that my silence was approval. That sounds ridiculous when I say it out loud doesn’t it. Before you do 1 minute of work or outlay a product that you expect to get paid for like Advertising Anna, you need to ensure that you have consent from the person who has to authorise your payment. If you are an online business you would have that built into your shopping cart process. If you are a service business you should consider a credit application or terms of engagement document or an agreement that clearly states what you expect to be paid for, and when you expect to get paid. MYOB has one built into their software. You can customise it to include any terms relevant to your business and print it out at the touch of a button. It will auto fill with your potential clients details. So what should you credit terms be? Well you should try and getting payment upfront. Sometimes this is not always possible. The next best option is cash on delivery. Then we start working with payment is due in 7 days, 14 days and so on. Now if you come to me and say Heather the industry standard terms are one month, two months in fact I have come across people who have quoted industry standards of 18 months, you are effectively loaning the client your money interest free for the time they are not paying you. I would not accept this, and I strongly encourage my clients not to accept this. I had this discussion with Competitive Clive who was owed nearly $400 000 and perceived that they their business had only one main competitor in the market. Competitive Clive said to me that they saw their extended credit terms as a competitive advantage over the other player in the market. If you can afford to do that, then maybe it is a strategy, but don’t have extended credit terms just because you believe it is expected of you. Reeling your hard earned cash in as quickly as possible. If you are at 30 days, pull it back to 14, if you are at 14 days pull it back to 7. I agree it may be difficult to change the mindset of long term clients, but I have seen it done. Also included within your payment terms you need to consider and set a reasonable credit limit. It’s very easy to oversell to someone who is not going to pay you. You don’t want to find that you are working beyond an agreed credit limit, you are not getting paid, and you continue to work, in the hope that you will get paid. You need to get paid, on reasonable terms and within a reasonable credit limit. So you have an agreement to do the work or produce the product, your terms are agreed, and you need to get an invoice to them on a timely basis.
- ECOFRIENDLY ERIC
- There are a plethora of small business gurus who will encourage you to outsource your bookwork. I have not yet, thank-fully heard of one of them saying ignore your financial statements. I agree outsourcing frees up your time to focus on what you do best, running your business, and that is a good thing. But whether you outsource or not you still need to take the time to look at financial statements.
- At a minimum I suggest you look at your Balance Sheet and Profit and Loss on at least a monthly basis. Pick up a report and look at it line by line. Each line is called a general ledger line. Does the general ledger line make sense to you? Do you know what it is representing? This is your information, if it is not providing you with useful information rename it, or recode it. Be careful of creating too many lines. I see this happen frequently, everything has its own separate general ledger line. This does not provide you with useful information; this provides you with too much noise, so you cannot see what is really happening. I dealt with a company that had as their income one solitary line income $10 million dollars, and then they had their expenses broken up into over a hundred lines including a line for office flowers. So when management looked at their reports, they would question the $300 spent on office flowers, as they really had no ability to analyse the income figure of $10 million. The office flowers were not relevant and should have been combined to give the business useful information, for example office supplies. You need to determine what information you need to make decisions for your business and then ensure that is what is being recorded and reported. Look at the dollar value of the information. Does it seem reasonable? If not look at what has contributed to the figures. Do your figures seem reasonable? Or do the transactions need to be recoded?
- Flying Solo has dozens of articles on their site on this topic. Veechi Curtis is outside selling various books related to this subject. If you don’t already have it, you should consider acquiring some accounting software. You can start with a basic programme for around $170. You could speak with your accountant and bookkeeper about information and learning sessions they may hold.