Understanding the cash flow cycle – and budgeting for all your costs – is critical for the health and growth of the business.
One of the most crucial challenges for small business survival is cash flow, says Nick Reade, ANZ General Manager for Small Business. “Cash flow issues can make or break any business, big or small. Understanding the cycle – how money flows in and out of your business – is the most important skill for small business operators. Without cash you can’t operate a successful business,” he said.
There are some guiding principles small business owners should follow to better manage cash flow including business planning, profit forecasting, reducing risk and debt management. Nick Reade has seen small businesses prosper and others struggle based on successful cash flow management. So what do small business owners need to do to successfully manage cash flow?
Understanding cash flow
In theory, the cash flow cycle is simple. It’s about converting goods and services into cash through sales and reinvesting that cash into the business. But cash flow is far from simple and not getting it right can be fatal.
Take for example a delay in payment from a customer. This may cause your business to run short of cash and consequently not be able to afford to buy materials to produce goods. Your business may run low on stock and not be able to fill orders and customers may start looking elsewhere.
And all the time wages, superannuation, utilities, insurances and daily expenses have to be paid. It’s a cycle that can quickly spiral out of control. Poor cash flow management continues to be a core reason for business failures in Australia.
Developing a business plan: Recent research by ANZ shows that 60 per cent of small businesses owners don’t’ have a business plan, many because they’re not sure how to tackle it. ANZ provides an interactive CD which takes business owners through the process of creating a business plan. “I’ve spoken to many small business people who have though a lot about marketing and branding but find it difficult to write and stick to a business plan. Without a solid business plan you could lose direction quickly – it’s a first step to success,” Nick Reade said.
Understanding profit and loss: Understanding the difference between profit and turnover is a fundamental principle of business success. Profit is what is left after all business expenses have been paid as well as tax. Small businesses should always have a very clear picture of their operating profit at any point in time.
“The irony is you can have a seemingly successful business, which is turning over a lot of money, but is not profitable,” says Reade. “Turnover doesn’t equal profit. If operating costs equal or exceed turnover, then you are just spinning your wheels, or worse making an operating loss. Developing a realistic business plan and sticking to it is crucial.”
Planning for profit: Completing a monthly profit forecast is a discipline every small business should adhere to. The first step is to estimate sales for the month – the key is to be conservative and make allowances for fluctuations. The second step is to estimate monthly operating expenses including salaries, superannuation, rent, utilities, materials and production costs.
Managing creditors: Most businesses buy and sell on credit terms, so it’s vital to be realistic about the time gap between when goods are sold and when payment for those goods is required and received. It’s an unfortunate reality that creditors may “stretch” payment terms, where debtors, like suppliers or business lenders, might not be so flexible. Cash flow gaps are a sure sign that the business could need tighter cash flow management and some help from a business finance expert.
Managing business debt: It’s also important to control debt. To help businesses use their own cash, ANZ recently launched the ANZ business Visa Debit card that enables customers to access their own funds through Visa’s worldwide network. It is the first Visa Debit card to be launched for business in Australia. Customers can make purchases online, over the phone, over the counter, overseas and access cash at ATMS.
Other tools: Online tools, like ANZ’s free small business hub www.thesbhub.com.au are especially useful for time poor small business owners. ANZ is adding even more value to the small business hub with dedicated education materials like a start-up business course, and webinars on key topics for businesses such as marketing and cash flow planning.
Source : my business Magazine March 2010 issue