Accounting and Tax

The importance of cash flow

Brent Cheyne Brent Cheyne
22 March 2019
3 min read

If you’re in the happy position of seeing your business in a growth phase, it pays to consider how you can most effectively manage your in-comings and out-goings. In a time of growth, cash is required to pay suppliers but it may not be replaced for some months until a sale is converted into cash. The level of Stock and Debtors will increase until these reach the optimal level for the business size and that requires an increase in the level of cash to support this growth. Funding is also needed to pay overheads, tax obligations and capital investment. Inadequate planning and management during this phase is one reason such a high percentage of new businesses fail in their first year.

To avoid this cash trap, here are some key tips to consider.

Choose the right business structure

It should limit liability but allow for the appropriate level of capital input from shareholders or partners and it should accommodate borrowing from both owners and external financial organisations.

Plan and budget

Create an up to date business plan that includes a Cash flow budget. Compare actuals to budget and regularly update the budget to meet reality. Prepare your own realistic personal budget so that you can draw a set budgeted amount from the business. Plan for income tax payments and at the very least have annual accounts and tax positions completed as soon as possible after balance date.

Carefully decide how to bring cash into the business

Introduce an appropriate level of cash into the business by way of capital or Owner advances. Meet further funding requirements with an optimal mix of short and long term debt.

Monitor sales and stock

Monitor Gross margins on your sales. Have as many Cash Sales as possible. Ensure careful stock management so as not to overstock. Use Consignment stock where possible. Have good systems so that all stock and sales are accounted for.

Keep control of debt and overheads

Negotiate better discounts and more favourable payment terms with your suppliers, where possible, including the possibility of instalment arrangements. Have a strict Customer Credit policy in place and administer this efficiently. Charge interest on overdue accounts. Stop Credit where necessary. Consider using a financing mechanism to fund your debtors. Consider leasing fixed assets instead of purchasing them. Monitor and reduce overheads as much as possible. Consider subcontracting rather than employing where appropriate.

Align your bank accounts

Consider maintaining a separate bank account where PAYE, GST and Income tax (expressed as a percentage of sales) are regularly transferred. This will ensure funds are available on due dates.

Brent Cheyne
Author: Brent Cheyne | Partner