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12 Reality check
karen lebsanft reveals how to make dough
geoff morgan and andrew banks advise on collecting cash
focus on
thinking about Cash Flow
2 The lifeblood of your business
3 Cashflow budget
4 Peaks and troughs
5 Stock control
6 How to ride the working capital cycle
7 Collecting debtors
10 The price is right
14 Cash flow forecast
15 Managing Accounts Receivable
16 At a glance
2 talk about
the lifeblood of
your business
Cash is the lifeblood of any business. How to construct a Cash flow budget
A cash flow budget is based around
Without it your business will die. a series of assumptions about the
expected performance of the business
in the future. These assumptions
need to be realistic and supported
Of all the reasons as to why businesses months of the year this business was by the most accurate data you
fail, insufficient cash flow is one of strapped for cash and nearly went have available. If you have access
the most common. Often this is not under as they only made enough to previous trading results then the
due to the lack of actual business or sales to cover their costs. In the best place to start is last years sales
the amount of sales being made but last month of the year they made and expense records. Allocate these
the mismanagement of the funds a couple of large sales and this is results into similar months that they
available. Every business has its what resulted in the annual profit occurred last year unless you know
differences, but the core principles of $50,000. Profit is the result of they will change in the future. You
are the same, cash is the lifeblood of trade over a given period, cash flow may want to increase sales to account
your business, without proper cash is required to keep the business in for more growth or you may know
flow management and planning your operation by covering day to day that you made an unexpected sale/
business will die. expenses. This is why it is important expense in a particular month last
to manage and understand how cash year that was a one off. You could be
Difference between profit and Cash flows through your business. looking at introducing a new product
It is important to understand that line or service, looking to buy a
profit and cash flow are two different What is a Cash flow Budget? new piece of equipment or employ
things. Many operators will tell you A cash flow budget simply records another person. These will all have
that it is possible for a business to the amount of money that you an impact on the cash flow budget
generate strong profits but collapse expect to flow in and out of your and are the type of things you should
because they have run out of cash. business over a given time frame. account for so that you can forecast
The easiest way to explain this is to It is a financial tool that will help as accurate a picture as possible.
imagine a business whose profit and predict the availability of cash in a If you plan to use the information
loss statement showed that last year business at any given time. Income on your profit and loss statement
they made a profit of $50,000. What and expenses are calculated monthly understand that these have been
the profit and loss statement doesn’t to help plan for any future short prepared for tax purposes and will
show is that for the first eleven falls in cash. account for non-cash payments such
3
Gary’s tips:
• Get your efficiencies in place, particularly
around debtor collection and stock
turnover, before your business goes into
rapid growth mode.
• Lease your machinery. My new company
doesn’t have its own equipment or plant.
I’m not having dead capital again, so
we’ve outsourced production, which
responds to demand. If we don’t sell stuff,
we don’t have any costs. I’ve learned to
get a better skew between our fixed and
variable costs.
• Build slowly and steadily. We are now
building a new distribution network,
taking care to choose those people who
want to align their personal goals with
ours and grow with us.
10 talk about
Some businesses reduce their prices make to cover my costs or just break something else. Unfortunately this
to obtain a greater share of the even, ie: the point of no profit but is not the case. If your rent goes
market with the aim to increase their also no loss? up by $10,000.00 the extra sales
price later and hopefully end up with Break even analysis is a financial required to cover this cost will almost
more market share than when they tool that allows you to work these certainly not be $10,000.00 but will
started. Unfortunately many who use things out. This sounds like rocket be dependant on your cost structure.
this approach find out that volume science but in reality it is quite For example, let’s assume I sell pens.
is bought more easily than profits. simple. Expenses in your business These pens cost me sixty cents to
There aren’t many wins with price can be divided into two main produce and I sell them for one
wars. Those who last the distance categories. The first of these are dollar. Therefore out of every dollar
are the ones with the least debt, the fixed costs. These are those expenses earned a portion of this is already
strongest balance sheet and know not directly related to sales ie. they spent. In this example the variable
their costs. remain relatively constant regardless costs are sixty cents, which leaves
By understanding your own cost of the sales volume and includes rent, me with forty cents in every dollar
structure you are able to answer wages, rates and utilities. All other to contribute towards all other fixed
questions such as: How many expenses are known as variable costs costs. This portion of the dollar is
extra sales you have to generate to and are directly related to the volume called the contribution margin.
compensate for a reduction in your of sales, which means for every dollar If the total fixed costs in my
price? If you increase your price, you make you incur an additional business add up to $120,000.00,
you could assume that you may cost eg. stock, materials, direct labour how many sales do I have to make
experience a decrease in sales. By and commissions. to break even?
how much can your sales reduce Often it is assumed that every If we know that out of every dollar
before it starts to affect your bottom dollar that comes into the business earned we only have forty cents (or
line? How many sales do I have to is another dollar to spend on 40%) left to pay for our fixed costs
11
Lack of resources has never stopped an Karen has had to “drill down into the figures”
enthusiastic business owner from launching to find out which products are making the
out into the unknown, but Kurrajong most money, and which customers are
was fortunate in that its fledgling baking providing the greatest value. This has helped
business – producing lavosh, biscotti and them to better understand the cash flow cycle,
mini-toasts – was a sideline to a successful and how to calculate their break-even point
restaurant and reception centre business. and focus on maximising profits.
Demand for the specialty breads and The analysis did not reveal too many
biscuits has exploded, and today Karen’s surprises, Karen says. But it did bring data to
products are sold in supermarkets and on support what she knew from “gut feel” about
Qantas business class flights. She speaks what was making money and what was not.
highly of the value of education, having done “We now do a cash flow forecast as part of
several courses available in the western our budget process, and watch it on a weekly
Sydney area. basis. Then we check at the end of the month
Husband Ben, 42, is the production and through our accounting system that our
finance part of the business, with Karen doing targets are on track.
Like many small the marketing and human resources. She says that prompt debt collection is a
businesses driven by Ben has been cooking since he was key to cash flow management.
14 and Karen has worked for many years “In business it is possible for one supplier
passion, Karen Lebsanft, in the hospitality industry, where she had to grow at the expense of another, so I have
42, found that under- to juggle budgets and use her project always explained to customers that we are
capitalisation was the management skills. businesses working together for the survival
major obstacle for Their trick of using the restaurant takings of both. So I tell all customers that the
to smooth out cash flows in the kitchen came account is due on a certain date and that if
Kurrajong Kitchens. to an end when the baking business overtook it’s not paid on that date we will be calling to
the hospitality business. The couple sold the remind them.”
restaurant and sub-leased part of a nearby Their company has just appointed a part-
bakery to increase production until finally time financial controller to manage the next
they bought the bakery. phase of the company growth, which will lead
With 40 staff and production of 30,000 to a public listing.
packets of lavosh and biscotti a week, the
business now has some serious cash flow
management in place.
ycheck
13
geoff morgan and andrew banks, who built and sold a couple
of recruitment businesses, advise on the cash flow cycle.
Karen and Ben have learned on the run what flow – primarily because our competitors
all SMEs go through once they start selling had poor systems and did not focus Tracking tips
their products. Sales usually aren’t the issue
– it’s the cash flow. Kurrajong Kitchens had
enough on cash collection.
At the beginning, our approach to
knowledge
cash coming in the door of their restaurant,
which got it over this initial hump. Then
accounting and finance was simple.
There were just seven of us in a small
is power
they had to manage the whole growth recruiting firm that was strapped 1 P ut good cash flow
process. They have done well in seeking for cash, hoping that we didn't go tracking systems in place
training and professional expertise to add to bust. Allen Kime our then part-time 2 If you take your eye off
their obvious business skills. accountant (who was 67 and had tried the numbers, the energy
From the very first days of our business, to retire twice) used to bring us a small will go out of your
we had strong systems and processes in square of paper on a Friday afternoon business
place to manage cash flow. that said it all. He listed the following
The motto underpinning our attention to (complete with weekly figures: 3 W
ork out what you need
financial strength was, “Where attention to track – cash in, cash
goes, so energy flows.” Invoiced sales out, turnover
Cash is oxygen for businesses. A business Cash in
4 If you don’t understand
might start out with a terrific idea but fail Cash out
the numbers, get an
because it runs out of cash. And that could Cash balance at bank/overdraft
accountant (even a part-
be for a number of reasons. Maybe they Number of placements
timer) to help out
didn't get enough from the bank. Maybe (people we had put in new jobs)
they had their foot on the accelerator FROM FLOURISH & PROSPER, BY GEOFF MORGAN
5 M
ake sure debts are
too hard. In the management services AND ANDREW BANKS (PENGUIN VIKING) collected promptly
business, you use cash to pay temporary
staff, and some of our competitors went
broke while we flourished. That was because
we managed our cash flow. We billed our
clients weekly and were prompt in collecting
the cash. So we had good cash flow in an
industry that traditionally had negative cash
14 talk about
Cash Sales
Collections (Accounts Receivable)
Other income
A: Total cash available
Accounts Payable
Past Due: Accounts Payable
General Expenses
Wages
Monthly long-term debt
(principle repayments)
Other
B: Total cash outflow
month end cash position (A - B)
collection tips
managing
accounts receivable
1 M
ake preparing your 10 Categorise slow payers and
oct nov dec total invoices one of your highest deal with them accordingly
priorities
11 r educe the grace period for
2 H
ire an experienced accounts late payment, and increase
receivable manager, and the frequency of reminders
have them form a favourable to late payers
relationship with the person
who signs the cheques 12 Make collection calls early
in the week. be personable!
4 P rovide customers with
information about the 13 If there are repayment
payment processes available issues, suggest an initial
deposit with an ongoing
5 A t point of sale identify how repayment schedule
they will be paying –
cash, cheques direct into 14 When an agreement has
your business account been reached, immediately
send a formalising letter
6 P rovide your account
details in writing 15 Copy all incoming cheques.
deposit the originals
7 Include due dates on all immediately and use the
invoices sent out copies for reconciliation
and accounting
8 If you offer a discount,
make sure it is clearly 16 Pay suppliers on a
spelled out on the invoice chronological basis –
rather than paying all
9 S end a stamped, self on the same day
addressed envelope
with invoices
16 talk about
cash
at a glance flow
Fill out the following cash flow inventory to
keys
reveal the state of your business for accounting, 1. Profit and cash are
tax and planning purposes. two different things.
2. Profit pays back
1 How much income are you generating
now and how much income can you long term debt and
expect to generate in the future? supports growth.
2 How much cash is tied up in accounts
receivable (and thus not available to 3. Cash flow pays for day
you) and for how long? to day expenses.
3 How much do you owe for rent?
Merchandise? Utilities? Equipment? 4. Every business should
4 What are your expenses, including complete a cash flow
payroll, payroll taxes, merchandise,
advertising, equipment and facilities
budget position.
maintenance, and benefit plans for
yourself and employees (such as
5. prepare THREE FORECASTS
health insurance, retirement, etc.)? FOR THE SAME BUSINESS –
5 How much cash do you have on hand? BEST CASE, WORST CASE
how much is tied up in inventory? What AND MOST LIKELY.
is your actual working-capital budget?
6 How frequently do you turn over your
inventory?
7 Which of your product lines,
departments or services are making
a profit, which are breaking even, and
which are financial drains?
8 What is your gross profit? What is your
net profit?
9 How do all of the financial data listed
above compare with last year – or last
quarter? How do they compare with the
projections in your business plan?
10 How does the financial data compare
with those of your competitors?
“
the more my
Assets grow,
the more my can i? Things you contacts
cash flow grows
”
commonly asked questions should know www.ausindustry.gov.au