Make cashflow planning your 2012 New Years Resolution !

Success in today’s business climate sometimes requires you to push aside your passion for your business and spend time sorting out your finances – not a pleasant thought!

But did you realise that a major part of managing your finances can be taken care of using one very simple tool – a cashflow forecast.

 This report can be done annually and will help you see whether your anticipated income will be able to cover your projected expenses.  It will also help you:   

·         realise and understand when cash is available 

·         plan and prepare for expansion, stock control and taxes

·         analyse and anticipate key expenses

Software packages can be purchased to help you generate a report.  Or, you could tailor make your own.  Here’s a simple method to do it yourself.

Step 1 – Create a cashflow forecast

Using a spreadsheet, create a table with appropriate headings.  Choose the length of time over which you want to run your report and the periods within that time.  For instance, you may want the report to show monthly amounts covering the next one or two years.   

Head up the first column ‘Cash Movement’ and across the top of the table enter the months of the year as the next column headings, like this: 

Cash movement	January	February	March

 In the first column, insert a heading entitled ‘Income’ and beneath that heading detail each source of income.  Add a row at the bottom for the subtotal.

Then insert a heading ‘Expenses’ and itemise each expense under that heading.  Set up a subtotal at the bottom of this group.

Next enter a row which shows the total of the income rows minus the total of the expenses rows for the month.  

Finally, insert a row for your running total.  In this row, add your profit or loss for the period to the previous running total and this will show your financial position at the end of the period.  

Your table should start to look like this: 

Cash movement	January	February	March
Income
Sales of A
Sales of B
Subtotal
Expenses
Rent
Telephone
Stationery
Subtotal
Monthly total
Running total

Step 2 – Input the data 

Using your accounting records, enter your actual income and expenses in the applicable columns.  Also, estimate and include any projected expenses in the coming months.  Be realistic – don’t overestimate income or underestimate expenses. 

You can do a forecast either with figures including GST or excluding GST. However if you record figures that include GST make sure you create an ‘expense’ item to record GST payments due ! 

When all your information has been entered, it should be easy to see where your money is coming in and where it’s going out: 

Cash movement	January	February	March
Income
Sales of A	11,000	9,000	10,000
Sales of B	9,000	10,000	8,000
Subtotal	20,000	19,000	18,000
Expenses
Rent	2,000	2,000	2,000
Telephone	350	300	260
Stationery	125	90	200
Advertising			800
Subtotal	2,475	2,390	3,260
Monthly total	17,525	16,610	14,740
Running total	17,525	34,135	48,875

 Cashflow forecasting can also be used as a budget planner.  For example, you may know your rent will be increased at the end of the year, or that you’ll have numerous bills to pay next month.  So you can make sure you keep enough funds in your bank account to cover these expenses.   

Your report will also indicate if you can afford to make an investment in your business; whether that means buying some new equipment, paying for staff training or an advertising campaign.  

Step 3 – Update regularly  

Once you have completed your cashflow forecast, it’s important to keep it up to date.  That means revisiting it regularly, say once a month, so that you’re always aware of how cash is flowing through your business.  Ideally, you want to be in the position where you can control your finances, and step in and take action if necessary, so that you have enough cash to take care of all your expenses.   

The benefits 

An annual cashflow forecast will give you all the information you need to keep on top of your business financially.  

You’ll have a clear vision of where and when you may need to cut back on spending.  At the same time, it will highlight some potential areas where you can invest that little bit extra. 

Not only that, once your cashflow is on track, you won’t need to lose sleep worrying about meeting your expenses and the everyday running of your business.  You’ll have more time to do what you do best and enjoy your business!

What are your business' values ....?

As published in the November edition of the Western Sydney Business Access magazine http://westernsydneyaccess.com.au/

Every business has a set of core values underpinning most, if not all of the actions and decisions that its owners and staff make on a daily basis (even if they don’t know what they are).

Successful businesses know what these core values are and have spent time developing them, modifying them and operating within them to maximize their chance of success.

Businesses that don’t know what their core values are, generally speaking are those businesses that have underperformed because their values are not aligned with the goals and objectives that they may or may not have set.

The ‘values’ and ‘practices’ in a business are what are defined as the culture of the business. Those businesses which have an adaptive culture which is shared and communicated between owners, staff and the public create an opportunity to give themselves a point of difference over their competitors.

So how do you turn a business’ values, practices and overriding culture into business success and more importantly for business owners, long lasting success and profits?

The key is to turn theory into practice. You can have the best set of corporate values written down on paper, but if these values aren’t followed they won’t transpire into a high performing culture.

It all starts with the owners. The owners of any business are the natural leaders of a business. Not all owners are the best ‘leaders’ however they still have to go about their day to day affairs using the values of the business as the framework for their decision making.

The owners will be responsible for defining the values of their business with or without input from their staff. The owners then need to communicate these values to the staff and make it very clear that these are the values of the business that have to be adhered to.

It is here however that many businesses fall down when non-conformity with these values is left unaddressed. Owners have to quickly deal with staff that don’t follow the values because it only takes one or two bad staff to bring the entire culture of the business down.

In comparison to non-conformity, adherence to the values can help to create a culture that encourages and inspires employees to take responsibility for the business and focus their efforts on achieving the shared goals of the organisation.

This is the beginning of the creation of a high performing culture, in part determined by the businesses values and can assist with reducing employee turnover which helps to improve a business’ profitability.

Taking a step back in the process the defining of the businesses values is an integral part of the planning process and is also a valuable marketing and reputation building tool.

I have talked in previous articles about risk management and the importance of business planning to give your business every chance of success. Well, defining the values by which you want to operate is really the first step in the planning process.

These values find their way into a SWOT Analysis….i.e. Strengths and Opportunities and how a strong set of business values can be a competitive advantage.

These values are part of risk management……i.e. What is the risk to the business if we don’t undertake our business dealings in line with our publicly communicated values? Client losses, revenue reductions, employee legal action? Lack of value conformity can result in all of these things occurring thanks to a dysfunctional corporate culture.

As a marketing tool, the communication of a business’ values to its clientele and stakeholders can be invaluable. Some clients or customers will chose to deal with a business which has similar values to them or values which they simply feel are honest and ethical.

The making of a business’ values public also makes a business, its owners and its employees accountable to stakeholders outside of the business for the following of these values. Thus ensuring these are not just mythical values created to follow a trend.

A businesses values and resultant culture will evolve over time. It is not an overnight sensation and in some cases for businesses which are using the creation of values as a change process will take a lot of effort and requires changes in the mindset of the organization to begin to work within these values

But as studies have shown that businesses which operate within a set of clearly defined, adaptive and positive values can outperform their competitors by sometimes 200% the short term and long term benefits both financial and non-financial are there to be had.

Avoid the bunker-down mentality......

"As publised in the Western Sydney Business Access Magazine, October 2011 Edition"

The uncertain and challenging conditions that business owners currently find themselves operating in throws up the question of ‘what is the best way to navigate through these tough times?’

In many cases business owners bunker down, close the hatch and take a month by month approach. But this isn’t the most effective approach.

Obviously there needs to be immediate attention paid to critical areas to ensure short term survival but this needs to be coupled with mid range and long range thinking and planning to ensure that the business is still positioned well for the future.

Drawing on concepts covered in a previous article, the key to surviving the downturns is planning. Those owners that have an effective business plan would have the risk management policies listed to help them manage the tough times.

So the first step is to revisit your business plan. This is the plan covering the short, medium and long term goals and if for nothing else will help business owners to remain focused on achieving their desired goals.

From this detailed plan and its desired outcomes, a strategy for the tough times can easily be developed and put in place. This ensures that this new short term strategy remains in-tune with the larger and long term strategy.

Next, get the customer focus right. The focus on and delivery of goods and services to core customers needs to remain effective to preserve cash inflows. Whilst at the same time the ‘firing’ of unprofitable and difficult customers can also assist with easing cashflow constraints.

As well as the review of existing customers, sometimes a shift in market conditions can throw up new opportunities as other businesses fail. Business owners need to be on lookout for similar or complimentary markets that they could enter to generate new revenue streams.

Staffing levels are an obvious area where cutbacks can occur during tough times. But this needs to be carefully managed. If a business lets go of key staff to save money, is the business effectively limiting its opportunities for growth come the eventual upturn in the market?

Another obvious area to review is suppliers. Are the best prices being obtained? Is the business able to take advantage of early repayment discounts? Is the business holding too much stock and effectively tying up cash?

The final expenditure area for review is general operating costs. Discretionary spending must be controlled and much like suppliers, time should be allocated to ensure that the best prices are being obtained and money isn’t being wasted.

Moving away from focusing on cash flows, another important tool is to begin to or continue to communicate. Communicate to staff about the downturn and the measures being taken to ensure survival.

Communicate with suppliers and other creditors to ensure they are aware that the business is going through tough times and explain the measures being put in place to address any cashflow issues.

Finally, once all of the strategic planning has been done, the business owner needs to ensure that the culture of the business is aligned to the ‘tough times’ strategy to enable it to be realised. This may require a shift in culture either for the short term or maybe even for the long term.

With all changes to a business’ strategy, whether short term or long term, the business owner needs to follow though with the changes. Everyone involved within the organization will look to the owner for leadership in tough times and it is critically important for the owner to be the champion of change.

Risky Business.....

"Article as appeared in the September edition of Western Sydney Business Access....."

SMEs are exposed to risks all the time. Some are risks that are imposed upon them whilst some are risks that they choose take. Such risks can directly affect their day-to-day operations, or their impact may be serious enough for the business to fail.

Do a Google search of the term “risk management for business” and the number and variety of returned results is mind boggling. It is information overload. Maybe this is why it is often overlooked.

Most business owners know that they can take out insurance policies to cover many of their business’ risks. However, there are many other risks that are either ignored or missed due to incomplete and ineffective risk management processes.

Risk management starts by identifying possible threats and events and then implements processes to minimise or negate them.

Effective risk management should reduce the chance that a particular event will take place and, if it does take place, sound risk management should reduce its impact.

As a side note, risk management is also used to assess and exploit opportunities that may present themselves to SMEs, but this is not the focus of this article.

Below are typical risk areas for SMEs. This is not an exhaustive list of all risks a business may face, rather it helps to explain the risk management process with some common examples.

 - Customers. Does the majority of your business’ income come from a single major customer or a group of major customers? If so, a loss of one or more of these customers could result in a large drop in profit and cashflow in the short term.

Here, businesses should look to either lock in major customers to long term contracts, or try to spread the risk by finding new customers or develop existing smaller customers.

 - Suppliers. Is your business dependent on one major supplier or a small number of suppliers? What would happen if one of these suppliers was unable to supply a crucial product or service to you which in turn forms part of your own product or service mix?

Much like customer risk, businesses should look to lock in suppliers to long term contracts, but also businesses should find alternative suppliers that could be used if needed.

 - Staff.  Not only can disruption from staff turnover affect profit and cashflow, for some risks there can be legal or regulatory consequences which can impact on your business.

Does your business rely upon key staff in key areas? If so ensure there is a backup person able to perform the each role. Is your industry plagued by high staff turnover? Make sure that you have quality recruitment procedures.

Do any of your staff hold key relationships with large customers? Ensure staff sign confidentiality agreements as well as reasonable restraint of trade agreements.

Do your staff face OH&S issues as part of their daily work routine? Make sure appropriate OH&S policies are implemented and followed.

 - Information Technology. Have you undertaken an assessment of what would happen if your IT system went down or if your data was lost? Also what threats does the internet, if used, pose security wise to your business?

Businesses must have a back up of their data but also a ‘back up’ plan for when the IT system goes down to ensure trading can continue. Internet security measures must be in place, like firewalls and Private Networks as well as physical security for its servers and hardware.

 - Internal Controls. For many businesses a lack of controls internally can expose businesses and their owners to theft and fraud from within. This risk is one of the most common as well as one of the most damaging.

Controls to protect against employee theft is often as simple as ensuring there is appropriate separation of duties. Unfortunately, employee fraud conducted by two or more individuals is harder to stop, but with effective controls the risk of this occurring can be reduced.

Other obvious risk areas that need attention and prevention/mitigation policies prepared for are; Financial risk, Competitor risk, Economy risk, Location risk, Succession risk, Reputation risk just to name a few.

Risk management is often undertaken on an ad-hoc and reactive basis, but as always, prevention is better than cure. Because business planning centres around the risks faced by businesses it makes sense that risk management forms an integral part of a business’ strategic plan.

Why cash flow controls are so important in busines.......

Picture a scenario where all of your customers decided to delay payment of your invoices by 30 days. How long could your business survive without this cash inflow? How would you pay your staff, meet your overheads and pay your creditors?

If you don’t know the answer to these questions then careful cash flow management is essential to not only your business’ success but to its very existence.

Cash flow management involves carefully planning your business’ cash flow needs via the formulation of cash flow budgets and developing policies and controls around its cash inflows and cash outflows. Here we focus on how to manage a business’ cash inflows.

According to Dun & Bradstreet cash flow troubles account for approximately 80% - 90% of business failures, and more specifically latest research links a 25% increase in business failures with a similar increase in the number of days a business’ customers took to pay their invoices.

On average invoice payment time is 53 days and for many businesses this is almost twice as long as the standard 30 day payment terms that they want to be paid within. And with trading conditions becoming tougher for most SMEs this average is expected to continue to increase.

So how do you keep the cash flowing into your business bank account in this current trading climate? The key is to have both preventative measures in place to ensure customer pay you within your payment terms to begin with as well as effective and efficient measures to reel in those customers who do stretch the friendship.

Below are the solutions we provide to our clients to assist them with developing their invoice collection policies.

Preventative Measures:-

·         Credit & reference check all new customers. This is a simple and cheap process to undertake because you don’t want to provide credit to a new customer who already has a history of slow or non payment

·         Set specific credit limits for all customers. As an internal control this ensures you do not extend credit beyond what a customer has been ascertained as being able to pay

·         Outline and agree upon payment terms up front and on a regular basis. Communication of these terms is the key to ensure customers can’t use the excuse, ‘sorry, I didn’t know they were your payment terms’

·         Make sure these payment terms are clearly displayed on your invoices. This is another way to remind your customers of the agreed upon payment terms.

·         Credit check existing customers. Much like the checking of new customers, this control ensures existing customers have not fallen into trading difficulties with other suppliers

·         Offer as many payment types as practical to your customers. Cash, Cheque, Credit Card, PayPal, EFT or even Direct Debit…...make it as easy as possible for customers to pay you so that they have less reason for delaying payment

·         Send out the invoice as soon as possible. As soon as the service is provided or the goods are delivered ensure the invoice is issued. If you don’t issue the invoices promptly you can’t expect to be paid on time.

·         Consider offering discounts for early payment. Business owners love discounts so if planned carefully, this can encourage faster payment of your invoices

·         Depending on your business, ask for a deposit up front before proceeding and considering progress invoicing for longer type jobs or projects. This can assist your customers with their cash flow needs and reduces the chance of a large invoice remaining unpaid for a significant period of time.

·         Ensure you have received written confirmation (i.e. a purchase order) for every order, especially if a customer requires their own purchase order number to be displayed on your invoice. This can reduce the risk of a customer delaying payment because of their own internal authorisation issues.

·         Develop a strong working relationship with your customers and encourage them to contact you if they need extra time to pay before the due date. This is just good business sense and ensures you aren’t just an anonymous creditor.

·         Ensure you have a complete and concise accounts receivable invoicing and tracking system in place and review your aged debtors regularly. If you can’t track when an invoice was issued and how long it is overdue, how can you expect to identify those invoices that need chasing up

·         Consider the use of debtor factoring or debtor finance. In come instances, the use of debtor finance can free up much needed working capital to allow your business to operate and grow, however the downside with any finance is that it comes at a cost.

Collection Measures:-

·         Follow up initial overdue payments promptly. As soon as an account is overdue, follow it up with either an email or phone call reminding your customer that they have exceeding their payment terms.

·         Continue with regular follow ups for longer overdue accounts. For longer overdue accounts, keep up the pressure with regular phone calls as well as emailing monthly or fortnightly statements

·         Make the customer commit to a payment date. Whenever direct contact is made with the customer, get them to commit to a payment date rather than a ‘sorry, cheque is in the mail’ response.

·         Offer repayment schedules. When you know that a customer is having trading difficulties, offer to assist them by agreeing to a repayment plan to clear the debt. Whether you charge interest on the overdue amount is at your discretion and may be dependent on your initial agreement.

·         Document all attempts to recover the debt. For legal reasons, make sure all the details of attempts to chase long overdue accounts are recorded as you may need these if the matter proceeds to mediation or court.

·         Use the services of a debt collection agency. If the customer is no longer going to be using your business and they refuse to pay your invoice consider passing on the debt to a reputable debt collection service.

·         Use the services of a solicitor. Much like a debt collection agency, the use of a solicitor is a last resort and should be used for larger debts owed by customers. The main reason for this is due to the costs involved in going down this path.

In summary when it comes to managing your customers and their payment of your invoices, prevention is always better than cure. So, the key is to do as much as you can initially to avoid having to waste time and money on chasing up bad debts.