Tick the right boxes to ease cash flow pain

Written by CPA Australia

Tuesday, 19 May 2009 22:52

THE global financial crisis highlights how businesses of all sizes in all sectors should carefully manage their cash flow, keep their books up to date, prepare budgets and compare actual results against budgeted results — things that are essential to proper management.

The information these exercises provide puts businesses in the best position to manage their cash resources. Cash is fundamental to the operation of a business. Even profitable companies can suffer if they do not manage their cash flow effectively.

Maintaining year-long discipline when it comes to business processes and strategy will enable small and medium enterprises (SMEs) to maintain the necessary levels of cash flow.

SME owners can boost the performance of their business and avoid end-of-financial-year compliance stress by taking a few simple — and regular — steps.

Checklist
CPA Australia has issued a checklist of key measures through which SMEs can instil good business practices to help boost the bottom line. The Small Business Good Practice Checklist suggests important ongoing actions that should help improve the management of a small business.

For instance, debtor analysis, accurate and consistent data collection and undertaking regular reconciliations of bank accounts and payroll.

These activities not only make for better management of business but help businesses comply with regulatory requirements. The checklist encourages a degree of ongoing discipline for greater long-term business benefit.

What the list does is point out the steps to be followed to avoid undue stress at the end of the financial year. Importantly, the list should be seen as a guide to implementing practices to deliver a competitive advantage through improved strategy and processes.

Regularly updating key business information will help create the information businesses need to help them improve overall performance.

The checklist covers five main areas:

Regulation, including income tax returns, payroll tax as well as WorkCover insurance;
Financial statements, including ensuring all data is entered into the financial system for the relevant period, stocktake and debtor analysis;
Strategic/operational issues including, rolling 12-month budgeted profit and loss statement, rolling 12-month budgeted balance sheet and a rolling 12-month cash flow forecast;
Good practice procedures, including developing a strategic plan and implementing and updating policy and procedures such as internal controls; and
Ensuring personal affairs such as will and trust arrangements and so on, are in order.

A few tips that should ensure your business is well-run and positioned to go where you want to take it include:

Analyse your debtors so you can chase late payers. You would be surprised how many small businesses do not do this.
Make sure you undertake reconciliations of not only your bank account, but also your creditors, debtors and stock. This provides the checks and balances you need to control these fundamental areas.
Make sure that the assets you hold are recorded in an asset register. This again is a check and balance that you should use to control your business.
Prepare a budget and review it monthly. Preparing and reviewing budgets monthly allows you to identify issues early and respond quickly.
Use the financial reports that good financial management produces not only to meet your compliance obligations but also analyse your business and compare with the industry you operate in.
Prepare a cash flow forecast. In these difficult economic times, it is important that businesses stay on top of their cash flow. Without cash, your business will fail. A cash flow forecast will give you an early indication of whether you are heading into difficulty, so you can act fast, such as seeing your bank.
Review the terms of trade you have with customers. With cash becoming tight and clients taking longer to pay, it is time to review your terms of trade so late payment does not get out of hand. For example, you could incorporate incentives into your terms of trade to encourage early payment.

Good practices
While the current economic situation may be the catalyst for many businesses to begin implementing these practices, they should in fact be a regular part of business no matter what the prevailing economic conditions.

Good business practices add value to your business. A business that is operating well is more likely to be successful, and if sold, done so at a good price.

There is no time like the present to start implementing the practices in this checklist into your business. Now is the best time to start implementing the practices that will see you through the current financial year and beyond.

A possible way to incorporate the checklist into your business practice is to include it as an agenda item for your regular meetings with staff and incorporate the tasks identified in the checklist into the job descriptions of relevant staff. CPA Australia’s checklist can be found at its website (www.cpaaustralia.com.au).

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Last Updated on Tuesday, 19 May 2009 23:09

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