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Payment Cycles affect cashflow

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. You are invited to share your tips and advice as to how you have successfully negotiated these activities in the past (add Comment below).

There are two key indicators for a small business: profitability; and cashflow.

The two are inter-dependant – but, are managed very differently. 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 collection of debtors.

As the economy in S E Queensland slowly recovers, there will be some businesses who for a variety of reasons have been able to survive the downturn, will fail in the early phase of the upturn. This is a phenomenon that has been observed by businesses – and accountants who advise those businesses – over the past several decades: and 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 and creditor obligations to remain solvent!

How do you, as a small business owner/ operator, manage this experience? It has been shown in the past that the following steps, 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 and honour settlement arrangements with your suppliers so that you will always be well within generally accepted industry standards – and certainly within the arrangements made; 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. In the meantime, we welcome Comment below on any particular strategies you have found successful in countering the cash flow dilemmas of economic cycles similar to what is currently being experienced.

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