Cashflow if the lifeblood of a small business. Making decisions on your bank balance is risky. Cash flow needs to be addressed long before a problem arises.
One of the biggest challenges experienced by many businesses in the post WA mining boom economy is a "cash gap" - a lag between cash inflows and outflows.
A business that suffers a cash gap may be profitable "on paper", but may have cash flow problems where they are required to pay suppliers, employees and taxes before receiving money from customers.
How would (and could) your business cope with the following?
- losing your largest customer?
- Breakdown of a significant asset required to operate your business requiring replacement?
- Hiring a new employee?
- an opportunity to fulfill a huge order of your product or purchase large volumes of stock at a good price?
Bridging the cashflow lag between payments and receipts with high interest credit cards and loans will evaporate any profit margin you may have.
Protecting your cashflow requires constant monitoring and the following strategies:
- sticking to your terms of trade and keeping on top of outstanding receivables
- potentially rethinking your terms to keep cash coming in regularly
- reducing your inventory levels
- negotiating your supply chain (requires a good relationship with suppliers)
- ensuring cheaper access to working capital
So many small businesses are bogged down in compliance (eg quarterly BAS, annual tax returns)., however, your business financials can tell you so much more.
No one has a crystal ball but cashflow forecasts are the next best thing. Regularly monitored, a cash flow forecast can assist you to make decisions on when and how your business will grow. Eg when to put on a new employee? Buy a new asset? Whether or not you take on a new customer or huge order from existing customer, loss of a customer etc.
A successful business needs a trusted adviser by their side. If your accountant is only providing regular compliance work, it may be worth finding one that can provide proactive solutions for your business.