Improving your business’s cash flow

Take into consideration the opportunity of an economic recovery, what do you need to do to take advantage of this? What would you do if your debtors stopped paying – how long could your business survive?

A recent report by credit agency Dun & Bradstreet (D&B) delivered a blunt warning to Small to Medium Enterprises (SMEs) about the patchy state of the economic recovery and the importance to focus on the fundamentals within your business. The report downgraded the risk profiles of a staggering 80,000 firms in the March quarter, a considerably larger number than March quarter 2009 when D&B downgraded 36,000 firms.

Ironically, the recovery actually caused extra cash flow problems for SMEs. As conditions pick up businesses can face a negative cash flow period by investing for increased sales but facing a period of longer debtor days. Even profitable companies are at risk of failure under such circumstances if they are not well prepared.

At the end of the financial year, it is a good time to use the full 12 month figures to understand where your business is at and to lay down projections for the year ahead. You should be meeting with your accountant anyway, so ask them to schedule some extra time to help you produce a cash flow projection including a conservative revenue and expense estimate.

The first step in this process is to get your books in order. Have you considered all the areas you need to tidy up before 30 June (see previous article for a few tips)?

The next step is to add in the details – a basic profit and loss statement is not really enough information to make an adequate cashflow projection. You must consider the micro issues such as changing interest rate costs, superannuation costs, inventory, bad debts and other rising expenses.

As the business owner you do need to understand all areas of the business and a basic understanding of the financials is important. A pro-active accountant will enhance your knowledge of your business by keeping you informed of changes that affect your business or areas you can work on to maximize cash flow.

Contact your accountant at Baker Affleck on (07) 5538 3088 or click here and we will contact you to arrange an appointment.