Our expert panel is well-suited to answer this month's reader question on cash flow:
"Despite my good turnover, I never seem to have enough money. Bills, money for stock and staff payments seem to eat into my profits and I never seem to be able to get in front. How can I make ends meet more efficiently—and build wealth—so I’m not always chasing my tail?"
Siimon Reynolds: co-founder, Love Communications
There three quick ways to fix that problem.
1. Set up a separate account and put at least something in it monthly. It could be one, five or 10 percent of what you make each month. The amount doesn't matter, what matters is that you mentally create the habit of saving.
2. Get clearer on your budget. Spend 20 minutes a day on your forecasts. Once you're really clear on in and outgoings, you'll be more efficient and increased profit will follow.
3. Do an hour of new business calls every day, no matter what. It's hard, but it will definitely increase your income.
Andre De Gasperi, business development manager, BankWest
There is an old adage in banking: turnover is vanity, profit is sanity and cash flow is reality. An understanding of these three will help you build your wealth and efficiently run your business.
1. Turnover: One of the most important things to ensure with a growing business is that you have quality growth. Know your product features and benefits and sell them, don’t sell on pricing. Remember that increased sales does not automatically equate to an increased profit. Generally, increased sales can imply an increased debtors or stock levels that needs to be funded, so knowing the impact of this is important.
2. Profit: Manage your costs and understand your fixed and variable costs. You also need to know your break-even position. To do this you need to apply the following formula:
break even = fixed cost / (unit price – variable unit cost).
3. Cash flow: Cash is king and the blood of any business. Interestingly enough, the majority of businesses that fail are actually profitable businesses – the business failure is due to the management not understanding the trade cycle (cash flows) of the business.
One of the fastest growing business finance products that can really help you efficiently run your business is invoice discounting. It means you can free-up your capital to strike better deals with suppliers, ease the strain on your cash flow, and spend more time doing what you do well which is building your business. Set-up is quick, the paperwork's minimal, and you preserve your bank credit line and effectively turn your debtors into assets.
Geoff Greer: regional general manager, nabbusiness
Research consistently shows that SMEs don’t have a cash management strategy. Despite wanting to turn a profit, many business owners and decision makers appear to be more focused on revenue growth or introducing new products. While these are important, cash flow is essentially the key to business success.
Cash management should focus on three key things:
1. Increasing the speed of collecting debtors: Put the right systems in place, establish terms and conditions of payment upfront, and make sure staff responsible for collecting payments are assertive. Make payment as easy as possible for your debtors. Credit card facilities allow your customers to pay you with one quick phone call and you will usually receive the funds the same day. And debtor finance enables businesses to access funds off the strength of their business credit sales.
2. Gaining better control of cash outflow: Consider your own payment methods. Electronic transfers can be scheduled in advance to make payments at a future date, on the last day of payment, rather than raising a cheque the week before to allow enough time for it to clear. Negotiate payments as close as possible to when your own debtor payments are due. Overdraft facilities should also be considered.
3. Maximising return on idle cash: Consider cash management accounts that pay higher rates of interest while maintaining ready access to funds, or meet with a financial planner to look at possible real estate, share market or superannuation investments.
Sarina Russo: managing director and founder, Sarina Russo Group
Cash is king. To build wealth in any business you have to build your sales, cut down expenses and determine sustainable profit margins.
As a road map to achieving my vision of running a profitable business I use the following five-point business strategy:
1. Your people are your biggest assets and your biggest restraint to profits. You need to employ competent and efficient staff who add-value to the business and help you make the step up to the next level.
2. The trade off between profit this year and future years: do you invest now and sacrifice this year’s profits for potential larger profits the years ahead?
3. Understand risk: The decisions you make that effect have a profound impact on your business.
4. Capital: Determine how much capital you have or can access, if needed.
5. Debt: Be aware of how much debt you can carry and service.
Raymond Chan, CPA, and executive, Asian Desk, ABN AMRO Morgans
"Pay yourself first," wrote Robert Kiyosaki in his famous Rich Dad, Poor Dad book. This is a great tip that the author observes most people don’t practice. Even if short of cash, people must pay themselves first. This goes in tandem with managing three things efficiently: cash flow, people and personal time. In terms of your business, cash flow budgeting is the most important tool.
Although business turnover is a measure of success, the flow of cash in and out of a business can be said to be its lifeblood. Cash flow budgeting is important to the survival and growth of a business. Unless cash is available at the time it is required, the business may have to close its doors, even though profits are being earned.
A well-planned budget allows you to identify any future cash requirement, any room for cost saving and expansion. The method of preparing a budget is by estimating cash receipts and payments for a projected period (normally 12 months).
Once you develop your cash flow budget, you can identify how much you can set aside for yourself (as salary or retained earning) and how much cost you can remove (e.g. excessive marketing cost). Hence, improving your ability to accumulate more wealth for investments.
