Cash flow is king Print
News - Rubrieke
Tuesday, 16 November 2010 10:54
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The change in landscape for companies has resulted in many more facets that need to be considered when opening or running a business. The new act has in some areas killed options for the entrepreneur, but the cost of compliance for businesses will be reduced at the risk of more personal liability to business owners. In all the changes there is still one constant to each business that has not changed and will forever remain the same and that is: Cash flow is king.

The influential factors are broadly classified as internal and external factors. Specific focus is placed on the internal factors as these factors can be addressed by the owner of any business.

External factors are unfortunately as such that reserves are the only measure truly effective against such threats. All cash flow issues start with a combination of poor internal controls, poor quality of information and lack of planning. The key reasons for these factors are due to certain myths business owners cling to.

Auditors and accountants have traditionally only been consulted when the business is already in trouble or when the annual financial statements are done. This is unfortunately not sufficient and, in the event of poor information compiled internally, this leads to skewed decisions made on insufficient information, leading to a direct loss in cash flow and finally possibly the business.

Talks on financial matters are held once a week at Bronberg Wine Estate

The biggest unforeseen killers in business are unplanned growth and cash conversion cycle factors (debtors, creditors and stock). When cash flow is held up in debtors and stock this results in major cash flow restraints and could ultimately kill a business.

Unplanned growth usually leads to over capitalisation of business assets, leading to excessive borrowing to implement plant and equipment implementation, ultimately leading to an increase of profits to facilitate payment on the loans, leading to higher taxation payment.

Although this is a mouthful we have to consider how we capitalise assets in the business environment as any loans only result in balance sheet activity and not income statement activity.

The long-term killer to cash flow is undoubtedly the owner’s withdrawals. When a business has stabilised and has a constant revenue stream, the owner’s withdrawals increase through various streams, whether by salary, increase in expenses paid by the business and use of company assets such as vehicles.

Unfortunately when there is a slow decrease in revenue, the effective remuneration to the owners are not matched in kind, resulting in a slow drainage of cash flow.

As business owners we need to change our perceptions and look towards our advisors to help us. As one individual we fail more often, but through partnerships we grow.