Five Rules for Smart Cash Flow Management
One of the biggest reasons for business failure in New Zealand is not common knowledge. No, it isn’t businesses failing to make a profit; it’s bad cash flow management!
Cash flow issues can be caused by several reasons. The most common are:
- The business is growing too quickly and does not have sufficient access to cash to fund the growth.
- Managers unaware of cash flow peaks and troughs causing poor decision making.
Regardless of the reasons for cash flow problems, one thing is certain; run out of cash and your business is dead in the water. Therefore, one would think it would be obvious and natural for businesses to have good cash flow management systems in place.
Amazingly the opposite is true. Although many businesses do have good Profit & Loss reporting, this is not true cash flow reporting, which far too many SME businesses ignore.
The dynamic nature of businesses makes keeping your finances in order more of a rocky road than a bed of roses. To help SME business owners run their ventures as successfully as possible, we’ve prepared a set of prerequisites to ensure your business not only stays afloat but thrives in the marketplace.
1. Bring in an Austerity Policy
From one point of view, it’s better for a Business Owner not to succeed too fast. If you have to struggle to make ends meet for some time, you’ll learn to appreciate both your work and your earnings. However, if you’re (un)lucky enough – depending on the perspective – to achieve growth quickly, bring clear austerity measures to bear to keep your spending under control:
- Allow for only essential purchases. Nothing but essential business items should be bought.
- Limit recruitment and payroll. Avoid long-term employment contracts. Go for outsourcing and freelancers where possible.
- Benefit from business planning – have a detailed business plan.
- Keep a close eye on overheads. Review suppliers and ensure you are always getting the best deal.
When your spending is tightly managed you’ll be much better placed to ride out the peaks and troughs.
2. Open Separate Bank Accounts
Using the business account for personal expenditure is the biggest temptation new business owners face. Some make this mistake due to a lack of experience. However, others simply relax and start spending their business funds for private purposes.
If you adopt such a lifestyle, you’ll have a wide range of problems. Your business will be in the red and it will take a lot of time to put it back in the black again.
You need to have two separate accounts. One of them should be registered on your company and used solely for business transactions. On the other hand, your personal account will serve your private purposes. As for the amount of money you will take from your company monthly as a salary, study several different options to find the best one for your business’s long-term financial health.
It can also be beneficial to open an account for tax. Transfer funds to this account on a regular basis to pay for provisional and terminal tax, GST etc.
3. Track Your Payments
If you want to manage your cash flow efficiently, tracking your payments is of the greatest importance.
Nowadays, banks offer cutting-edge tech solutions that improve payment tracking. These packages include access to all your accounts on the Internet, and making online payments. As a result, you will have a clear record of all the payments made to and from your business accounts, which should be automatically updating to your accounting system.
4. Forecast Cash Flow
Profit and Loss Reports do not tell you your cash flow. There are lots of payments we need to make that do not appear in this report. In addition collection and payment of funds always has a time lag from when we complete the activity.
Many payment obligations we have are not regular and it is easy to forget when these are due.
Good cash flow reporting can plot your cash position well in advance, to assist you in making sound informed decisions.
5. Pay Taxes on Time
Have a clear understanding of what your tax obligations are and when they are due. Build a good reputation with the IRD for paying correctly, on time.
Many people have a reluctance to pay tax, as a necessary evil, and in some mysterious way think if they ignore tax and shut their eyes that it may mysteriously go away.
Not only is interest to the IRD for arrears high, but also their penalties are crippling.
If you have arrears, get in contact with the IRD ASAP, sort out a repayment plan and then stick to it. Once up to date, stay up to date.
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