One of the most common questions I have been asked by business owners is, “If I made all this money where did it go?”  They made a good profit, but they are no better off financially.  This frustrating feeling comes because a profit and a cash surplus are not the same.

Most business owners are good at knowing what their sales are and watching their costs.  By watching sales and costs business owners have a reasonably good idea of their profit which is sales less costs.

What about the cash of the business?  Looking at the balance of your bank account does not give you a good enough idea of your cash position.  It may be good today, but tomorrow you may have to pay wages or pay your BAS.  While profit drives cash, there are also many more drivers of cash.

Some of the key drivers that soak up cash are:
• Debtors: People that owe you money.
• Stock:  Growing stock & parts levels.
• Debt:  Paying off loans sucks cash.
• Owners drawing extra cash.

Managing and looking after these is just as important as managing your costs.  In fact these areas need more management as without good management they can grow and your cash levels will be struggling.

The money you take out of the business can amount to much more than you think, if you do it in a structured way.  The best way to manage it is to take a set wage or drawing every fortnight when everyone else gets paid. This way you are treating yourself and the business as two separate bodies and creates good financial discipline.

Most accounting software will be able to show you what has happened with your cash. Xero has a “Cash Summary” report and Quickbooks a “Statement of Cash Flows”.

One of the big things a business needs cash for is working capital. That is to be able to pay the wages and expenses while you are waiting for the customers to pay you.  If you are growing you will need more working capital.  The length of time when you start working on a sale to being paid is called the cash conversion cycle.  The longer the cycle the more dollars you have tied up in working capital.

Good cash management reduces the cash conversion days by asking three types of questions.
• How do I eliminate mistakes?
• How do I shorten the cycle times in each area – production, invoicing & payment etc?
• How can I improve our business model?
Doing this exercise can unlock tens of thousands or even hundreds of thousands of dollars in most businesses.

Managing a business well means you give high importance to the cash as well as the profit.  They are two sides of the one coin.

Peter Ambrosiussen is the principal of Ambrosiussen Accountants & Advisors and a certified Gazelles International Coach.  www.ambrosiussen.com.au

View LinkedIn Profile – http://www.linkedin.com/pub/peter-ambrosiussen/29/171/a24

Published by Toowoomba Chronicle www.thechronicle.com.au on Saturday 9 February 2013

Call Us!
Share This