Perspectives: Cash flow

February 2012

Cash. It's the lifeblood of any business.

Despite the political rhetoric that Australia's economy is in comparatively good shape compared to other Western countries, the reality is that many small businesses are feeling the pinch of a slower economy, consumer uncertainty and the failure of interest rate cuts to jumpstart spending.

The threat of a second coming of the GFC has raised the spectre that small businesses will continue to struggle in 2012.

Last week, Dun & Bradstreet released its annual report on the health of SMEs and reported that small business bankruptcies have jumped by almost 50%, and cash flow is the culprit.

Small businesses generally don't have healthy cash reserves of their bigger brothers so the impact of longer payment cycles, tightening of credit and poor consumer and business confidence is felt much more quickly than elsewhere in the economy.

While new start-ups have fallen sharply, many small businesses are doing well, if not thriving. Why? Because they understand the drivers within their business and how to manage pressures on their bottom line in less than ideal economic conditions.

So how can you prevent your business becoming a member of the failed small business statistics?

Know your current position
To manage your cash flow effectively, you need to have financial data at your fingertips – and that includes more than just your cash flow and balance sheet – to truly gauge the health of your business.

Business failures often result from the lack of understanding the true position of the company and impact of poor management. This is usually due to having a limited financial function that provides top-level figures without the benefit of in-depth analysis.

The call for more money to solve problems within the business often doesn't resolve them however.

Throwing good money after bad or cutting costs without understanding their longer-term impact won't solve issues that are lurking beneath the surface, particularly if the people who created the problem don't know they exist or how to fix them. Having the objective perspective of an accountant or business consultant can help identify the core issues that need to be addressed and provide a road map to navigate through difficult times.

Reducing risk
Understanding your financial position will help to identify areas of risk in your business and staying on top of cash flow is critical to managing that risk.

Smaller businesses are at the mercy of their bigger brother's payment cycles, and this can pose a significant risk to the health of the business when those payment cycles get longer in tougher times. Invoicing on time and chasing up outstanding payments as soon as possible after they are due is one way to ensure your cash flow stays healthy.

Another key consideration is to be careful of where cost cuts occur as they may inhibit your business's ability to grow or deliver its services. Planning beyond recession is critical to ensuring you're able to take advantage of opportunities that arise when the economy recovers.

Keeping a tight rein on costs – but don't throw the baby out with the bathwater Inventory can be one of the biggest expenditures in a business, as money gets tied up in products that need to sell. Understanding your position will help you to identify what products are selling and how often, as well as the product lines that are not performing.

Managing and maintaining solid cash flow is also critical for SMEs to manage their expenditure, particularly, inventory, paying bills, managing your tax and super commitments and working capital.

If you have heard of the phrase "time is money", then you will understand becoming more efficient and reducing production turn around times can save money without cutting essential parts of your business out.

Revisit your strategy, marketing and sales
Changing conditions will impact SMEs throughout 2012, however those that have the ability to review and adapt to the uncertainty will survive better than those who do not. Having the knowledge and confidence to act with speed and certainty compared to the competition will pay dividends.  

Consumer behaviour can change quickly in tougher times as the pennies become a focus. Product and service orientation aligned to these changing needs can be crucial, as can product diversification and business rationalisation.

Get advice

If you are experiencing cash issues within your business, it is highly recommended that you speak to an accountant to understand how to manage and improve cash flow.

Related article:  How do you know that your business is heading for trouble?

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Last updated February 2012. This article is provided for information purposes only and should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.