Wealth management and business asset protection are strategies that are very much aligned. Payment Cycles affect cashflow and business operators need to exercise caution in extending credit and giving payment commitments.
There are two key indicators for a small business: profitability; and cashflow.
Profitability and cashflow are inter-dependant. They are managed differently from each other. Cashflow that arises from unprofitable activity is only deferring the inevitable. Profitability without adequate cash flow can still render a business impotent, potentially even insolvent.
For an investor, pensioner or wage earner, spending more than one earns leads to one of two equally undesirable outcomes –
- living off borrowed funds (on which interest will be payable that will not be tax deductible); or,
- eating into savings/ reserves that will diminish long-term financial independence.
For a business owner-operator the consequences are similar but often more public – and painful. The financiers to small business will usually be in one of three forms –
- equity contributed from personal wealth;
- borrowings from a financial institution (usually a Bank); and
- working capital (the difference between cash-at-bank, debtors and stock; and creditors).
In this situation, profitability adds to equity but positive cash flow only comes when there is –
- sound management of the ordering process,
- honouring commitments to creditors (suppliers); and
- timely collection of debtor payments.
As economies recover from recessions, some businesses that survived the downturn, will fail in the early phase of the recovery. Businesses, and their accountants, have been aware of this phenomenon for several decades. There is no reason to expect it to be different this time. Be aware that payment cycles affect cashflow in a way that may render your business unable to meet its –
- debt servicing, and
- creditor payment obligations
to remain solvent!
How do you, as a small business owner/ operator, manage this experience?
The following steps are recognised management strategies –
- implemented in a timely manner, and
- consistently applied,
will go a long way to staving off financial disaster:
- Review credit policy and ensure account customers can service their debts and obligations. (They will not be able to do you any favours with preferential treatment in the event of a pending insolvency);
- Implement and strictly apply debt collection systems and processes;
- Negotiate settlement arrangements with your suppliers so as to
- always comply with accepted industry standards – and
- always satisfying the arrangements made with them; and
- Ensure that your Bank is fully aware of your cashflow needs well in advance of any extra-ordinary needs arising.
Every small business owner will be utilising the consulting services of an accountant. We strongly recommend reviewing the above matters with your particular adviser.
Continuum Financial Planners Pty Ltd is colloquially known as ContinuumFP. Our team are experienced, professional financial advisers and associates, dealing with all aspects of personal wealth management. They work to the mantra that –
‘we listen, we understand, and we have solutions…’
to your advice needs that we deliver in documented
‘personalised, professional wealth management advice’
To make an appointment with one of our advice team –
- phone our office on 07-3421 3456, or
- at your convenience, use the linked Book A Meeting facility.
(This article was originally posted by us in November 2012. We occasionally refresh/ update it, most recently in August 2025.)