“Cash is King” – if you are planning for success, this is the most invaluable tip to remember.

Do you often ask yourself, I’m making a ‘profit’ but I am still struggling to find cash? Have you considered your working capital? This is the money needed to fund the day to day operations of a business.

What about your;
• Debtors – the people that owe you money
• Stock/ Inventory/ Work in Progress – sales yet to make
• Creditors – the people that you owe money

The key to successful cash flow management is to control each of these three components of your business. Business owners often confuse their cash flow with their profit, but cash flow is the net change in cash in any one period – whether it be a month, quarter or a year.

Cash flow equals
• The net profit achieved (revenue less expenses)
• Less the net change in working capital (increase or decrease in debtors, stock and creditors)
• Less the change in capital expenditure (assets)
• Less any dividend payments or ‘drawings’
• Plus any debt or loans received (funding)
• Plus any capital or equity injected (contributions)

The fundamentals of managing cash flow are
• Working capital management – decrease your debtor days, increase your creditor days and minimise stock on hand
• Profit management – are your sales based on a correct profit margin?
• Cash flow forecasting and planning – know when money is coming in and needs to go out
• Be constantly monitoring your cash flow – don’t rely on your cash flow being funded by the ATO (i.e using GST monies received that needs to be remitted to the ATO)
• Making only necessary capital expenditure – don’t buy an asset if the only motivator is to get a tax deduction.
• Set yourself a cash flow budget and monitor weekly, monthly, yearly

Debtor Management & Collection
• Make sure you have a credit policy and STICK TO IT
• Make sure you customers are aware of your terms
• Make sure you are invoicing promptly and not waiting to the end of the month eg on the spot using on line accounting software such as Xero
• Make it easy for people to pay you eg portable EFTPOS machine, banking details on invoices
• Clearly label and reference your invoices
• Follow up outstanding invoices
• Make sure you are connecting with the person responsible for making the account payments
• Don’t hide behind emails, ring to chase
• Constantly review your debtors ledger – the cash is better in your pocket than in theirs

Stock Control
• Constantly monitor stock movement and stock held
• Don’t reorder slow moving stock
• Do regular stock takes – does it agree to your inventory system – if stock ‘walking’ off the shelf
• Identify the 20% of stock items that generate 80% of your profit and focus on these
• Discount and move on stock – don’t hold on just in case

Creditor Management
• You are not managing your cash flow if you are:
o Not paying your creditors
o Not paying your BAS, Super and Taxes liabilities
• Establish a purchasing procedure and notify your suppliers of your payment terms.
• Or, try negotiating trading terms and pay according to these terms
• Consistently communicate with your suppliers – try to bargain better deals
• Manage the payment of your creditors

Cash flow Management
• Cash forecasting is absolutely critical. You are recognising when money is coming into the business and when money needs to go out.
• Bank reconciliations should be done daily. This is made so much more simpler when using an online software program that automatically downloads your daily bank transactions eg Xero
• Make sure you are putting away the GST you remit and don’t utilise this to fund your business.
• Know your numbers! Do you notice a drop in your Gross Profit Margins, what about wastage or do you know what your cost of labour is.?
• If you don’t know your numbers have your accountant explain them. PJT is always here to help
• What are your key drivers? Understand where you are making your money – what job, what product, what customer
• Don’t under quote your competitor to get work – this may increase your revenue but not your profit – it is a prime way to discount your business to bankruptcy

Most importantly - have a strong Management and Accounting team around you. Invest in an advisor – you don’t know and can’t do everything. Regular management meetings will keep you on track and focused on how & where your business is going. It’s too late to change when you do your income tax returns as this is a review of the past.

Remember, investing in the right advice, is investing in your future – your trusted PJT Advisor is here to help. Contact us for more information.