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Most cash flow challenges can be avoided through an in-depth understanding of your business’s financials.
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5 tips to get your finances back on track

Even Australia’s most successful companies experience their share of cash flow troubles, especially small businesses. Here are five of the more common causes:

  1. Sales – sales prices are too low and there is not enough profit margin to cover operating costs
  2. Customer – slow paying customers / non-paying customers. Some small businesses are uncomfortable asking their customers for money, and some larger companies will only agree to invoice terms of 60 or even 90 days. Moreover, many small businesses provide customers with invoice credit without conducting credit checks
  3. Spending – businesses in the growing phase rapidly incur overhead costs such as rent, staff and materials, before they can recoup revenue from sales
  4. Funding – banks have tightened lending criteria affecting many Australian businesses and continue to make it more difficult to obtain loans or increase credit limits
  5. Tax – no proactive tax planning; many businesses doesn’t factor their goods and services tax (GST) and income tax liability in the course of the operations

 

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It’s a good idea to set up a separate bank account for your GST, PAYG and superannuation.

A classic cash flow problem

A client of mine ran a successful small business with more than $2m turnover. They had factored in a decent profit margin into the service they provided, however they never had enough cash for BAS / income tax payments. The main reason was the business owner ran his spending budget based on the cash balance from the online banking, which doesn’t factor item such as GST collected, PAYG and Superannuation withheld from wages.

After being appointed as their virtual CFO, I set up a separate bank account for them, and reserve all GST, PAYG and Super into that account weekly. This allows the business owner to make operating decisions based on the actual cash availability in the business transaction account.

 

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Sitting down with your accountant at least once a quarter will help you to better understand your business finances.

My top 5 tips for managing your cash flow better

  1. Sales – ensure sales prices are set at the correct level and factor in profit margin to cover operating costs
  2. Customer – utilise your accounting software to send payment reminders to your customers on the due date, and call your customers and chase for payment seven days after the invoice is overdue. I also recommend conducting credit checks prior to approving a credit limit, or collecting a deposit prior to work commencement
  3. Spending – closely monitor your spending with your accountant, especially critical expenditures such as office costs, staffing and capital expenditures
  4. Funding – do not rely heavily on bank funding due to their tightened lending criteria
  5. Tax – conduct quarterly tax planning review with your accountant and open a second business bank account. This will allow you to put aside all the collected GST and potential income tax liability

Most cash flow challenges can be avoided through an in-depth understanding of your business’s financials. It is worthwhile to sit down with your accountant at least once a quarter to better understand your business finances.

Excerpt reproduced with permission from Real Time Minds

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Patrick Yuen

Patrick Yuen from Real Time Minds is a CPA accountant and taxation specialist who has extensive experience in assisting small businesses achieve their financial goals. He believes that start-ups, entrepreneurs and small business operators should be able to access quality accounting and business advisory services without the price tag of a full time in-house accountant.

The opinions expressed in this article are the opinions of the author(s) and not necessarily those of Homeloans Ltd.