Fiscal management concerns itself with how money flows into a business along with how it is utilized to ensure positive growth. With Australian based businesses worrying about a turbulent international economy, and the effect this will have on trading conditions domestically this presents a very uncertain stage for trading in 2013. Despite the grim picture of the future painted by some doomsday economists, 2013 is turning out to be a year with exciting prospects for growth – but just not in the way your business may usually expect it.
How should business owners and managers prepare for this coming year? There are conflicting reports from leading economists that predict in the short term, consumer spending and state spending will remain relatively unaffected. Since various experts are divided politically and economically on how the changing taxation policy will take effect and how it will affect both individuals and businesses, reviewing and utilizing time-tested tenets of accounting will help you take control of your cash flow situation and ease your worries about the uncertainty ahead.
Where to Look
You will need to take a look at what affects the cash coming into your business, the components that control overhead spending and the relationship between a balanced chequebook and an increasingly healthy amount of flow. Clearly analyzing these factors will reveal key differences in the cash you will have for spending, and the payments you will need to make for both inventory and services. Every cash flow gap that you can identify is an opportunity to take control of your business, and secure it for success.
Since every business exists because transactions increase value, the more products you sell and the more services your business renders, the more your customers will value your business. Corollary to that would be the expectation that you are turning a profit as well, and it all seems like a win-win situation. However, when you have sold your products or render services in return for a customer’s promise to pay at a later date, you create a value where none existed. After all, how much would you pay for a promise?
Give Credit only where Credit is due
Accounts receivables represent successfully but as of yet unpaid sales, so to manage your cash flow, you must know the negative effects that extending credit may cause. By the time your customers actually pay up, you may have needed that amount to pay off suppliers, pay your employees or you may have expanded operations at an earlier, more opportune time!
Take a look at your credit terms. What are the policies you set when extending credit? How do you set the limits on credit; how do you set deadlines for payment and collection? What are the processes? All credit terms affect the timing of cash flow into your business. Are you comfortable with high and dry lean seasons that routinely come into your business? Is your business affected by seasonal ruts?
Establishing correct credit policies ensures that your cash flow won’t surge then dry up or get all dammed up with creditors or the banks. Many businesses routinely offer trade discounts, on longer or shorter terms, to improve their cash flow during such times. Re-thinking this for 2013 will position your business at the head of your given industry at a time when businesses which would have once seemed immune to adverse trading conditions now seem very vulnerable.
Balance vs. Flow
The real value of a business can be evaluated in terms of cash value only or based on other factors – sustainability vs. profitability; social factors vs. overall value as well. Traditionally, however, accountants divide their methodologies into cash-on-hand or accrual accounting based on how money flows into a business. They routinely encourage business owners to ensure a healthy cash flow by projecting how and when money needs to be utilized.
Despite the amount of money flowing into or out of a business, value is also assigned to its physical assets. Among these assets are of course the goods you deal in. Examine your need for keeping inventory and just keep what is needed for the smooth operation of your business. Did you buy on credit? When you purchase your goods or services on credit, your business creates accounts payable that are owed to your suppliers, usually within 30 to 90 days.
Just as you paid close attention to the payment schedules of your clients, re-examine how you schedule your own payments. As your business grows and as profits increase, don’t automatically expect your bank balance to grow – it may, but in the coming year, smart cash flow management may be the best security for surviving these nervous and uncertain times for trading.