Getting serious about cash
The saying goes ‘‘Cash is king’’ but not enough small-business owners take heed, putting the futures of their companies in jeopardy.
Graham Cooper is a builder and director of Cooper & Cooper Renovations, a company he has run for the past 12 years.
He has learnt plenty of things about running his own business over the years, but says things such as dealing with lots of invoices was not something he thought a lot about at the start.
The consequences of not getting on top of cash flow are simple – ‘‘you can’t pay anybody’’ – and Cooper says he makes sure all the basics are done right.
This includes getting invoices out on time and making sure jobs are done properly the first time so that does not hold up invoicing.
‘‘Having an accurate and realtime picture of cash flow has been pivotal for growing our business,’’ he says.
Cooper is not alone in not initially having the comings and goings of his company’s money at the front of his mind.
According to Annette Free, a senior accounting lecturer at the Auckland University of Technology, business owners generally put little thought into cash flow management.
‘‘Often business owners have really fantastic ideas – they’re very skilful at what they do – but the money management is just not something they’re interested in,’’ she says.
Some of the major problems small-business owners run into include:
Being under-capitalised: Free says business owners sometimes do not anticipate how much money they are going to need and they do not have a good cash-flow forecast. They also sometimes grow too quickly without the necessary capital.
Taxation: ‘‘The first thing small businesses don’t understand is that they are collecting GST on behalf of Inland Revenue. You still need to be very careful you set aside money to pay your GST when it’s due.’’
That means setting aside payas-you-earn tax and other deductions made on behalf of employees, such as Kiwisaver and student loans. ‘‘That isn’t your money. You must set it aside otherwise when pay day comes you haven’t got the money.’’
BDO business advisory partner Doug Haines says there are several good reasons why business owners need to take cash flow management seriously, with the most obvious being that they cannot pay their staff or suppliers without cash.
‘‘Small businesses struggle with this the most because they’re gen- erally growing at a faster rate than a mature business,’’ he says.
SMEs typically need cash to buy raw goods or assets to generate goods or services, but they might not get paid for some time as they gain momentum.
So they need to think about how to fund this, whether through overdrafts and borrowing or loans and equity.
Haines says one of the most important things any business owner can do is create a cash-flow forecast that helps prepare for peaks and troughs and gives good grounding to approach banks.
‘‘The one thing the banks will always look to is the validity of your financial management structure,’’ he says.
‘‘Who’s your accountant? How reputable are they? How quickly do they turn things around?
‘‘What accounting package are you using? Who’s using it and how well are they using it? And are you forecasting?
‘‘If you’re not doing those basics, you’re creating an opportunity for failure.’’
A good accountant can help business owners with the nittygritty of cash-flow management – but there are tools available to help, too.
Xero, for example, is rolling out two new features to help smallbusiness owners improve cash flow and get paid faster: an invoice reminder and a billable expenses feature that helps recover expenses from customers as quickly as possible.
Aside from Xero, there are other cloud-based accounting systems including MYOB.
Whichever option it is, Haines says it is important to remember that cash really is king in the business world.
‘‘Revenue is vanity; profit is vanity; cash is reality,’’ he says.