Effective cash flow management is critical to running a business, particularly in periods of economic instability. Poor cash flow management can exert pressure on a business and lead to it being unable to meet expenses as and when they fall due. This in turn can result in a claim for insolvent trading and/or directors being found liable for company debts.
With rising inflation, supply chain issues, and the ATO announcing its intention to retrieve outstanding debts, it’s integral that you have control over your cash flow. A strong understanding of your business’s cash flow will enable you to effectively manage liquidity and address any concerns early.
If trading is becoming tougher and cashflow tighter, we suggest looking at implementing the following strategies and processes:
- 13-week cash flow forecast
We recommend implementing a detailed 13-week cash flow forecast that monitors both cash inflows from debtors and cash outflows for payment of creditors. It should include various employment entitlements and any historical debt repayments. It is important to monitor existing and upcoming expenses, ensuring that there are sufficient short-term assets available to meet these obligations when they fall due. An inability to meet some payments, particularly in relation to employee entitlements and the ATO, may lead to a director penalty notice and possible insolvent trading claims. The consequences of missing certain payments carry more weight than others. Having a cashflow forecast will better enable business owners and operators to prioritise payments and plan ahead to ensure they’re made on time to avoid penalties.
- Debtor management processes
Once you have a cash flow forecast in place you should focus on your debtor management and converting invoices to cash as soon as possible. To allow for consistent cash inflows, it is essential to have strong cash collection processes in place, including controls for overdue receivables and when you should stop supply, to ensure that cash is received in a timely manner.
- Budget and reduce overheads
Having a budget in place for expenses helps to manage cash flow and ensure desired margins are achieved. Creating a plan of expected outgoings and comparing these to actual expenses, can direct focus to specific areas of concern early and allow them to be addressed. Furthermore, the level of detail in a budget can be adjusted to suit the needs of a business, depending on what concerns may be faced by the business.
- Preparation and review of budgets/forecasts
Budgets and cash flow forecasts are working documents and should be frequently reviewed and adjusted depending on changing circumstances and business objectives. Depending on your current circumstances, these forecasts and budgets may need to be reviewed and adjusted daily. Your accounting systems should compare your budget forecasts to actual results, noting any overrun of costs. Data within the accounting software should be up-to-date and accurate to support reports that will help with effective decision making
To schedule your ‘William Buck Hour’, throughout which we will help you assess your current position, realign your thinking and maximise your business’ potential, contact your local William Buck Business Advisor.