Small businesses must recognise the importance of cashflow to ensure success

Australian businesses have lost sight of the importance of cashflow, which can determine whether a business thrives or fails. Businesses must take steps to get tighter control of and visibility into cashflow.

Every single decision affects a business’s cashflow, whether it’s a capital investment or simply ordering new stationery. Buying items on credit can help preserve cashflow, while selling items on credit reduces cashflow. It’s essential for business owners to make smart decisions about when to use cash versus credit.

In the first year of operation, the availability of terms from suppliers for most purchases can produce a good uplift in cash surplus. However, in the second year, that uplift is much smaller since it’s only measured on the change from one year to the next.

Businesses can also inject cash into the business through a one-off sale of an asset or a one-off investment from the owner. The emphasis here is on the “one-off” nature of these injections.

Sustainability is judged by assessing whether or not the business cashflow next year will be in surplus without these one-off injections. Investors and owners need to understand why the business may have needed a one-off injection this year, and whether that injection fixed the problem so that, next year, cashflow will be in surplus again.

RSM’s 2016 thinkBIG study revealed that 77 per cent of business owners were planning to fund their business growth through cashflow, indicating that management of the underlying business cash is a key factor to business sustainability and expansion. The study also showed that 29 per cent of businesses fund operations through debt and 28 per cent choose to reinvest profits to fund the business.* Furthermore, another recent study showed 32 per cent of business owners dip into their own accounts while 44 per cent use credit cards as their primary tool to manage cashflow – an expensive habit that one.**

RSM Australia recommends the following when it comes to improving cashflow in your business:

1. Budgeting for tax liabilities

Many businesses spend or reinvest all of their pre-tax profits without considering their tax liabilities and the timing of when they will fall due. During the last quarter of the financial year, it is crucial to review financial results for the year with an advisor.

2. Clearly understand your bank obligations

Although debt is cheap to maintain at the moment, be wary about leveraging the business with too much debt.

3. Review your debtor collection policy

Don’t fall into the trap of not chasing up non-payment by customers, and make sure that you have a strong policy in place for collecting fees.

4. Push creditor payments out until they are due

Be organised when paying bills. Paying just before the due date maintains cashflow without missing out on early payment discounts.

A cashflow statement tells you a lot about a business. RSM recommends that businesses ask their adviser for a cashflow statement each year, as well as a profit-and-loss statement and balance sheet, so that the decision-makers can see just how sustainable and healthy the business actually is. Australian businesses seem to have lost sight of the importance of this crucial tool and it’s essential for them to put it back on the radar as an indispensable measure of business performance and sustainability.

* thinkBIG 2016, RSM Australia

** Commonwealth Bank Small Business Study (2016)

Peter Saccasan, National Head of Business Advisory, RSM Australia

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