Cash flow - the key to sucess

In reality, cash flow is the key to survival.

Australian Securities & Investments Commission statistics tell us that in 2004 and 2005 there was an average of 18,000 businesses that entered into external administration or insolvency. Furthermore, the Small Business Development Corporation statistics tell us that 60% of small businesses fail in the first three years of operation. We believe that in many cases, these failures are due to a lack of understanding of the importance of cash flow.

The flow of cash….in and out of your business…..is its lifeblood. Whoever said “You’ll never go broke making a profit” got it absolutely wrong. You may be trading profitably in the sense that you are “making a profit”, but unless your cash flow is under control, you could go out of business.

Today’s economic conditions make cash flow planning even more critical to the survival, growth and profitability of your business. With increasing petrol prices, rising inflation and the recent RBA increase in interest rates it is fundamental that appropriate forward cash flow planning be undertaken to assist in survival. With little or no planning you could be forced to borrow additional funds or even have to sell assets to cover debts.

The Need for Cash Flow Management

A common mistake of so many businesses is to concentrate too much on profit….and too little on cash flow. And yet without a balanced cash flow, your business cannot survive.

Concentrate on cash flow. Because it will provide you with:-

• Discipline;
• Direction; and
• Control in your business environment.

What is a “Cash Flow Forecast”?

It is an action plan expressed in monetary terms, preferably produced for an 18 month period on a rolling quarterly basis.

Cash flow forecasts provide a benchmark against which actual performance can be monitored and the rolling forecast can be altered on a quarterly basis to take account of current changes such as; legislation, petrol price changes, etc.

You may know what your current cash position is….but do you know what your future cash flow requirements are?

What will it be in three months time?

Yet you can and should know. This knowledge will enable you to effectively manage the cash flow of your business and you will be in control of your own destiny!

If you have a cash flow budget which is reviewed against actual cash flow performance, on a rolling quarterly basis, you will be in an excellent position to analyse your business position and, where necessary, to implement corrective actions.

For example, a minor improvement in any of the following financial areas could contribute to a significant improvement to your cash flow improvement and success:-

• Asset utilisation;
• Accounts receivable management; and
• Accounts payable management;

A cash flow forecast provides you with the ability to effectively plan and control your expenditure in co-ordination with your income as it is received.

Once the cash flow forecast has been finalised it is then critical that these estimates be measured against actual performance. For instance, it is important to know how you have performed in relation to your forecasted sales and expenses and other targets defined in your cash flow forecast.

Please contact us if you would like any further information on cash flow budgeting and forecasting or if we can assist you with this important business management tool.