Expert tips to keep your business in the black

CASH FLOW:

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Published by Switzer Media + Publishing, w. switzer.com.au Contributors Peter Switzer, Rosemary Ann Ogilvie, Joe Kaleb, Jodie Fox, Robert Ishak All material copyright © 2013, Switzer Communications Pty Ltd. Reproduction in whole or part is not permitted without the written permission of the publisher.

CONTENTS

Taking care of cash flow has seen Robert Ishak’s business, William Roberts Lawyers, experience exponential growth.

Small Business E-Book Series

What is cash flow and why is it key to success?

06

Spotlight on budgets: why they are vital to help maintain the financial health and cash flow of your business.

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Chartered Accountant Joe Kaleb answers common questions by small business owners on cash flow, and shares steps to create a cash flow strategy.

Jodie Fox and her Shoes of Prey co-founders have capitalised on a gap in the online market, while keeping a firm reign on cash flow to manage their success.

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Seven take-away cash flow tips.

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Cash flow management is essential to the health of a business. There are two crucial aspects to cash flow – managing your revenue collection and your costs. I always remember the words of a retired bikie who started a recording business: “I never realised that you can go years without making profit but that you’d be lucky to last six months with negative cash flow,” he said.

My advice to all business owners is to become experts and professionals on cash flow and budgets. This may take time, which is why we have collated tips and tools for managing cash flow in your business.

This e-book will open your eyes to what cash flow is and how it can make or break your business’ success. It also offers strategies for best practice financial management. We have

About this e-book:

IN BUSINESS, HEALTHY CASH FLOW AND SOUND FINANCIAL MANAGEMENT ARE NON-NEGOTIABLES.

profiled two successful business owners for their tips on cash flow and how it has been key to their growth:• Robert Ishak of William Roberts

Lawyers, and• Jodie Fox of Shoes of Prey.

We will also show you how to monitor your costs via budgets to ensure you maintain a tight control on your finances. And Chartered Accountant Joe Kaleb reveals his top tips for healthy financial management, including steps to create a successful cash flow strategy.

We hope this e-book inspires you to boost your cash flow prowess – and therefore your business’ longevity.

“It’s my business to spark your enthusiasm and enrich your business.”

Peter Switzer

Cash flow is vital to business survival. But for many business owners who aren’t proficient in accounting practices, it’s foreign territory. It’s important to learn the basics of good financial management in order to stay in business.

So what is cash flow? Cash flow is the pattern of income and expenditure of a business and the resulting availability of funds at any given time. Cash flow is important because it is the main indicator of your business’ financial health.

Many business owners confuse profit with healthy cash flow, but it’s important to understand the distinction. You might have funds sitting in the bank, but what happens when a large bill comes along and clears those funds? To avoid a deficit, you need a solid debtor strategy to ensure timely incoming payments, and need to ensure you have enough funds available to pay suppliers. When it comes to healthy cash flow, timing and budgets are key (see page 8 for more on budgets).

COLLECT WHAT IS OWED

In business, collections are an important element. For any business to survive, it is essential

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Spotlight on cash flow

WHAT IS CASH FLOW?

to keep receivables (money that is owed to your business) flowing steadily in. Before you start collecting, you need to establish a solid infrastructure that will help insure you against bad debts. Every business, no matter what its size, should have a documented credit policy.

The size and complexity of the policy relates directly to the size of the business, and how competitive the industry is. When you are starting out or if your business is very small, you only need a one-page document that outlines points such as:• Minimum information required to

establish an account• Establishing credit limits• Billing cycle (eg. 7, 14, 30 days)• Terms (7 days from invoice date, 30

days from statement date). While you may have to bow to market pressure and offer extended credit terms, don’t be too generous.

Make sure you adopt healthy cash flow habits in your business now before it’s too late.

Spotlight on cash flow

5

Make paying accounts as easy as possible for debtors. Offer customers a range of payment options, such as BPAY, credit cards, an online store, or a merchant terminal if you are a retail business. In many cases, these payments will be credited as cleared funds, which enhance your cash flow and remove the uncertainty of whether or not a payment or a cheque will be honoured.

Here are some clues: • Collect overdue accounts (eg. if

a 30-day account is unpaid at 35 days), by phoning and asking for payment to be made immediately.

• Suspend credit (eg. a 30 day account unpaid at 60 days).

• A debt is classified as ‘bad’ when all efforts to collect it have brought no results or when the account reaches 90 days.

PRIORITISE YOUR BILLING

Many small businesses allow months to elapse between completing a job and billing their clients. The standard excuse is lack of time. The answer to this is unequivocal: make time. Send invoices immediately, for the correct amount, with a clearly detailed description of the goods or service, as originally quoted or negotiated. Include all the information the customer needs to process it for payment: order numbers, quotation number, job number, etc. Use well-designed letterheads or email templates with your firm’s name and address prominently displayed, including all the relevant contact information.

Running an accounting software package such as MYOB or Quicken facilitates prompt preparation of invoices and gives up-to-date information about each debtor’s status. You will need it for GST, so get it installed as soon as possible to allow yourself time to learn it.

COMMON CASH FLOW TRAPS:• Havingmoneytiedupinexcess

stockonhand.Thiscouldcauseproblemswhenthestockturnoverishigh.Particularlyatthestartwhenthebusinessisunsurehowmuchstocktheyneedtocarry.

• Discountingtooheavilytogetthesale–wherethecashyoureceivedoesn’tprovideanappropriatemargintobuyortoputbackintothebusiness.

Toensureyourbusiness’financialhealth,askyourself:

• WhatamIdoingnow,intermsofplanning,soIhavesolidrevenueinthenextthree,sixor12months–orevenlonger?

• HowmanyproposalsdoIhaveouttherethatcouldbringinfuturerevenue?

• AmIabouttobuynewequipmentthatwouldbemoreeconomicaltolease?

Robert Ishak spent four years in the legal industry before branching out with his friend and fellow lawyer Bill Petrovski to create William Roberts Lawyers. The business was incorporated on 1 July 2005 with Petrovski and Ishak as its founding shareholders and principals. Since then, the commercial litigation practice has grown to 40 lawyers with 60 staff and offices in Sydney, Melbourne and Singapore.

According to Ishak, the secret to sustaining the impressive growth, was healthy cash flow.

“Without a healthy cash flow, William Roberts could not have put the infrastructure in place to support the purchasing power of the business,” he says.

So how does the Sydney-based company ensure a steady stream of income? Ishak highlights the importance of setting payment terms with suppliers and clients that are reflective of both the market and the business’ cash flow projections.

“If budgets and cash flow projections are realistic and backed up by performance history,” Ishak says, “they assist in building beneficial relationships with your banker and key stakeholders by:

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Case Study: William Roberts Lawyers

LAW AND ORDER

• Demonstrating your commitment to evaluating and managing financial risk

• Demonstrating an intimate understanding of your business

• Providing clarity for bankers around financial capacity

• Building trust and demonstrating integrity.”

“This in turn will lead to a supportive partnership between the business and its banker.”

But what about managing quieter cash flow periods? How can businesses plan for those times where there’s more money going out than coming in?

“Ensure you have a very proactive and engaged accounts team that manage and follow up any lagging

Cash flow has been key to the growth of William Roberts Lawyers, which started with two principals and now has 60 staff across Melbourne, Sydney and Singapore.

7

Case Study: William Roberts Lawyers

debtors in the lead up to quieter periods,” Ishak recommends.

“Also, maintain a strong relationship with your bankers and ensure you have the ability to draw on assistance when needed.”

Many business owners fall into the trap of seeing funds come in and then spending them on items that are needed within the business. But Ishak abides by the less is more approach.

“Avoid the pitfall of spending all, or almost all, of what you collect. Wherever possible, ‘reserve’ funds so that you can sustain your business during quiet cash flow periods.”

PLAN OF ATTACK

William Roberts has also developed a business plan with a firm focus on cash flow. Ishak says the following key aspects are identified within the plan:

• Key growth objectives;• Capital growth budgets;• Operational budgets;• An assessment of the business’

financial capacity (in terms of ability to service the debt);

• Strategies for sourcing appropriate funding at sound commercial rates; and

• A short-term and long-term action plan with key delivery dates.

One of the key cash flow lessons Ishak has learned over the years is the importance of planning for growth – both strategically and financially – to manage the risk of cash demands.

“Ensure you have documented realistic cash flow forecasts,” he warns. “Do not set and forget. Cash flow is fluid and requires regular monitoring and adjustment.”

“Wherever possible, ‘reserve’ funds so that you can sustain your business during quiet

cash flow periods.”

ROBERT ISHAK’S TOP FOUR TIPS TO IMPROVE CASH FLOW

1.Gettoknowkeysuppliersandclientsreallywell(includingtheircashflowcycle)andreviewthebusiness’paymenttermsonanongoingbasistoensureyouhavenegotiatedthebestpossiblepaymenttermsbasedonyourcashflowneeds.

2.Setrealisticcashflowbudgetsandcriticallyassessthecashflowcyclethroughasensitivityanalysis(forexample,10percentlessrevenueand/or10percenthigherexpenses).

3.Planbyanticipatingthecashneedsofthebusinesswithsufficienttimetoregrouporadjustwherenecessary.

4.Communicateandworkwithyourbankers.

Many business owners have experienced this scenario: a collection of invoices arrive, the tax man rears his head, a debtor is taking its time to pay and the post-Christmas dent on the budget is starting to show. It’s these situations where a realistic budget can help minimise the strain on your cash resources.

By doing a cash flow projection, you can make sure there will be enough funds in the bank to accommodate any potential credit crunches your business might face.

For many small-to-medium businesses (SMBs) in a growth stage, or for sole operators, it is crucial to budget for any unexpected costs that may arise, such as buying new equipment or hiring a new staff member.

According to Gavan Ord, Policy Adviser at CPA Australia, budgets help owners manage costs and allows the business owner to actively monitor the business by:• better managing the business by

coordinating resources;• evaluating the performance of

an area;• generating or improving upon

action plans; and• providing information necessary to

Cash flow can make or break your business’ success, but budgets help to ensure its financial longevity.

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Spotlight on budgets

SHOW ME THE MONEY

help business owners understand strategic uncertainties.

THE BUDGET LOWDOWN

Understanding the difference between types of budgets is key.

For a comprehensive picture of your business’ financial health, accountants recommend preparing three interrelated budgets:• a budgeted profit and loss;• a budgeted balance sheet; and• a budgeted cash flow statement.

“Budgeted cash flow statements allow a business to measure its working capital or cash and to calculate the finance requirements at a particular point of time,” says Ord. “This can lead to a more correct calculation of borrowing costs or help business determine in advance

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Spotlight on budgets

whether they want to borrow money or seek finance from different sources.”

An operating budget is the annual budget of an activity containing estimates of the total value of resources required for the performance of the operation.

“If the owner only prepares a budgeted profit and loss statement or an operational budget, without a budgeted balance sheet and cash flow statements, they are only looking at part of the picture. This is risky as there is no check on what particular strains a profit and loss budget will put on the business’s working capital and existing bank facilities.”

REVIEW AND RE-ADJUST

Be sure to regularly review your budgets – this will help you manage any unexpected costs in business.

“A small business should prepare a budget annually and should (depending on activity) review performance against budget monthly,” says Ord. “If the business is having cash flow difficulties, the cash flow statement should be reviewed more regularly.”

It is crucial to budget for any unexpected costs that may arise, such as buying new equipment or hiring

a new staff member.

FOUR TOP TIPS FOR CASH FLOW MANAGEMENTYour accountant is one of the best sources of information for budgets. Here are Gavan Ord’s tips for cash flow management:

• Make sure you do a cash flow statement and you review it regularly. If you’re having problems, you may need to review more than once a month.

• It is important to appropriately manage your debtors and creditors. Make sure that you’re setting your payment terms for your creditors as far off as possible and try to get the cash from your sales as quickly as possible.

• It’s crucial to manage cash flow, and not over-invest in stock or inventory.

• A cash flow statement gives you an indication some time in the future where you may need extra money (a good thing to know in advance so you can prepare and go to your bank early). Banks like businesses to go to them early if they’re going to have some cash flow problems – and you may be able to negotiate a better interest rate as well.

What steps do you recommend for creating a successful cash flow strategy? 1.Undertakecreditchecksonallnewcustomers.

2.Issueinvoicespromptlyandsendoutstatementsmonthly.

3.Trackoutstandingaccountsreceivableandhaveapolicyforchasingupslowpayingcustomers.

4.Takefulladvantageofcreditorpaymenttermsandnegotiatebetterterms(forexample,discountsforearlypayment).

5.Prepareandupdatecashflowforecastsonaregularbasis(eg.arolling12-monthforecast).

6.Understandthedifferencebetweencashflowandprofitwhenpreparingthecashflowbudget.

7.Don’tforgettoincludeGST,taxandloanpaymentsaswellasotheritemsofcapitalexpenditureonthecashflowbudget.

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Ask the expert

CASH FLOW Q&A

What are the key cash flow challenges small businesses commonly experience?1.Notpreparingaccurateandtimelyforecasts.Consequently,bankerscouldbeunwillingtoadvancefurtherfundsinanemergency.

2.Whensalesstafffocusonrevenuetargetsandnotoncollectionterms.

3.Failingtochaseupslowpayingcustomerpaymentsonatimelybasis.

4.Notunderstandingthekeydriversofthebusiness.Forexample,ifaveragecreditorpaymentsare30days,butaveragereceivablesare45days,that’s15daysthatrequirefunding.

5.Nothavingproperinventorymanagement.Forexample,havingtoomuchcashtiedupinslow-movingornon-profitablestock.

When it comes to cash flow, the numbers don’t lie. Chartered Accountant Joe Kaleb answers some common cash flow questions asked by SMBs.

Ask the expert

What is your top tip for maintaining healthy cash flow?Prepareandupdatecashflowforecastsonarolling12-monthperiod.Ensurethatthecashflowbudgettakesintoaccountdebtorandcreditorpaymenttermsandallcapitalexpenditure(forexample,loanandtaxpayments).

What advice would you give to other business owners looking to improve their cash flow situation?Reviewfinancialstatementsregularlyandunderstandthekeydriversofthebusiness–suchasgrossprofit,breakevensales,averagedebtorandcreditorpayments(indays).Don’tbeafraidtoseekhelpfromyouraccountant. How can businesses manage

quieter cash flow period?Planningisveryimportant.Invoicecustomerspromptly,andactivelychaseupslowpayerspriortothequietperiodsothatcashistheretopayforoperatingexpensesandemployeeholidaypay.

How important are budgets and cash flow projections in your clients’ businesses?Budgetingisavitalfunctionformanyofmyclientsparticularlyformanufacturersandwholesalerswhoexperienceperiodsofbothpositiveandnegativecashflowduringtheyear.

Budgets are essential to managing your cash flow and can mean the key to your business’ success - think of them as the

financial lifeline that will keep you in control and on track to being a more

successful operation.11

You could say that women and shoes are a match made in heaven. And one savvy Australian business that has capitalised on this love equation is Shoes of Prey – a website that allows women to design their own shoes, including their choice of heel, toe, fabric, colour and embellishment.

The business was founded by former lawyer and advertising executive Jodie Fox, who manages product research and development and communications, and her two law school colleagues Michael Fox and Mike Knapp. After stints in law, both worked for Google – Mike as a software engineer at Google’s headquarters in Mountain View, working on high profile projects like Google Reader, while Michael joined Google’s advertising sales team in Sydney.

They were looking for a new opportunity to explore a gap in the online retail market, around the same time Fox had discovered cobblers whom she could commission her own shoe designs while on a trip to Asia.

“With the marriage of the two ideas, Shoes of Prey was born on 8 October 2009 – the very first to

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Case study: Shoes of Prey

HOT SHOE SHUFFLE

market globally with this concept,” says Fox.

Fox agrees a cash flow strategy is an integral part of business success. Without the fundamentals in place, it could be detrimental to a business.

“Poor cash flow can cripple core functions, which means that you never have the opportunity to focus on growth, only survival. It will also hamper your ability to be agile when an opportunity arises or a need to shift strategy pops up.”

Fox believes business owners can leverage technology as part of a positive cash flow strategy.

“Technology provides the opportunity for businesses (especially retailers) to review and in some cases remove upfront capital costs including product storage in expensive city-centre retail space, testing new geographies without large initial cash injection and the

Jodie Fox reveals how cash flow has been a key ingredient in the success of Shoes of Prey – an online business that has attracted $3 million in funding.

Case study: Shoes of Prey

13

ability to outsource work on demand rather than having the burden of full-time salaries on the books.”

In March 2010, Shoes of Prey was one of the first few brands to pioneer working with a YouTube blogger, helping the business hit the fast lane of growth.

“The result of this video was to triple our business, permanently,” Fox reveals. “The Wall Street Journal has since covered the case study.”

Hiring their first staff member proved a strain on resources during this growth spurt – so how did the business manage that from a cash flow perspective?

“It was one of those moments where you need to put up cash before you have the amount to spend – but you know you need to do it for growth,” recalls Fox. “We ran ourselves quite lean during this time until the resulting growth could support the spend.”

Last year, the business’ growth was ramped up even further, thanks to a $3 million investment by US venture capitalist Bill Tai, Michael Arrington’s early stage venture capital firm CrunchFund, plus Mike Cannon-Brookes, the co-founder of home-grown software giant Atlassian.

“It has had a really extraordinary impact – I can’t tell you how amazing it is to see our business kick into this higher gear,” Fox says.

“We [recently] completed a recruitment phase around the funding. We’re a team of 27 people across six

offices globally. We now have real desks in our office, cleaners twice a week and many projects that have been waiting for ‘one day’ are now underway.”

With “multi-million-dollar revenues in under two years” under their belt, it’s an exciting time for the business. So what advice can Fox share for other businesses to build a successful cash flow strategy?

“Map out in detail all costs and forecast revenue over a six-month period, being as accurate as you can as to when debts fall due and cash comes in so that you understand what to prepare for,” she says. “Stay on top of how your cash flow tracks against your plan and be prepared to adjust your spending accordingly.”

“Defer payment of invoices until the last

date of the invoice period and review your criteria

for spending to run lean.”

SEVEN TAKE-AWAY MESSAGES FROM THIS E-BOOK TO IMPROVE YOUR BUSINESS CASH FLOW

1.Setyourcredittermscarefully.Theneedtoextendcredittocustomersisafactoflifeformostbusinesses,butitisimportanttosetclearlimits.Carefullyresearchthestandardcreditperiodforyourindustryandmakeanhonestassessmentabouttheconsequencesofshorteningyourcreditterms.Reducingyourpaymentperiodfrom90to60daysmightloseyouonecustomer,butiftheother99willpaymorequicklyitcouldbeworthit.

2.Makeyourdebtorspayquickly.Itisvitaltomastertheartofdebtormanagement.Onesuggestionistoensuredebtorsknowhowmuchtimetheyhavebysendingpaymentnoticesondifferentcolouredpaper–with30daystogo,sendabluenotice,15daysanorangenoticeandbrightredwhenpaymentisrequiredimmediately.Asmalldiscountforearlypaymentcanalsoprovideaneffectiveincentive.

3.Payyourcreditorsslowly.Takeadvantageofcredittermswhereyoucanandprioritisecostsaccordingtotheseverityoftheconsequencesfornotpaying.Wages,taxesanddirectdebitsareatthetopofthelist,keysupplierssecondandeveryoneelselast.

4.Knowwhenleancashflowpatchesarecomingandplanaccordingly.ItisinvariablymoredifficulttogetdebtorstopayatBAStimeandoverChristmas,somakesureyouhaveabitofleewayinyourcashaccountstopaywagesandotherinflexibleexpensesduringtheseperiods.Equally,avoidfundingmajorpurchasesfromyourbusiness’workingcapitalunlessyouaresureyouhavethecashtocoverit.

5.Usefinanceproductseffectively.Overdrafts,premiumfunding,leasefacilitiesandcashflowfundingproductscanallbeexcellenttoolstohelpmatchabusiness’cashsupplywithplannedoutlaysifusedsensibly.Eventhebusinesscreditcardcanbeagoodwaytoeasethesqueezeaslongasyouaresurethedebtcanbepaidbeforeinterestkicksin.

6.Donotincurpenalties.TheAustralianTaxationOfficeandtheAustralianSecurities&InvestmentsCommissionbothimposepenaltiesforlatelodgementsorpaymentsinsomecircumstances.Payingthesedebtsfirstwillsaveyoumoneyandstress.

7.Keepyourhandsoutofthetill.Disciplineyourselftomakecashdrawingsonlyinlinewithconservativecashflowforecasts.

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Still seeking more infomation on cash flow to boost your business?

• WatchourCashFlowManagementwebinar,partoftheBusinessWebinarSeries,featuringPeterSwitzer,CommSec’sCraigJamesandCharteredAccountantJoeKaleb,whosharetipstoadoptbettercashflowmanagementpracticestoensurethegrowthofyourbusiness:http://www.commbank.com.au/business/webinars.html

• DownloadCommBank’sCashFlowTrackertoolstraightintoExcel,witheasy-to-useinstructions: http://www.commbank.com.au/business/betterbusiness/calculators-and-tools/cash-flow-tracker.html

• VisitBetterBusiness,whereyou’llfindpracticaladvice,uniqueinsightandbusinessresourcestobenefityoursmallbusiness.Whateverstageyourbusinesshasreached,ourexpertsareheretohelp:http://www.commbank.com.au/business/betterbusiness.html

Also check out CommBank’s social media sites:

http://www.youtube.com/commbankbusiness

http://twitter.com/commbank

https://www.facebook.com/CommonwealthBankBusiness

http://www.linkedin.com/company/commonwealthbank

http://blog.commbank.com.au/category/your-business/

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Expert tips to keep your business in the black

CASH FLOW:

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