Thursday, July 30th, 2009
With tough economic times prevailing, businesses should be aware of the importance of healthy cash flow to thrive and survive through this period, according to respected accounting and advisory firm MPR Group.

Marc Peskett, partner of the Melbourne based firm, says cash flow management should be the top priority for businesses this financial year, which can be achieved by implementing a number of simple key systems and processes.

“Failure to constantly review and manage cash flows, particularly in this environment, is the key to avoiding financial strain and ultimately preventing business failure,” Mr Peskett says.

“It’s no secret that businesses that have cash or access to cash will have a better chance of survival than those businesses that need to borrow to keep their doors open.

“The odds will continue to stack up against small businesses that fail to capitalise on the simple opportunities that are readily available to them to keep their cash flow healthy.”

With estimations that the overall number of bankruptcies nationally rose 6 per cent between 2007/08 and 2008/09, Mr Peskett says there are many ways to accelerate the flow of cash from customers to the business to stay afloat, even for those currently without a cash-flow budget.

“One of the most important things is to put together key data such as sales and expense forecasts and then set up a simple budget worksheet that tabulates cash flows, such as your beginning cash balance and your budget cash inflows and outflows,” Mr Peskett says.

“This exercise at the very least will give you a platform from which to plan and monitor as the year rolls ahead.

“This information will also form the basis of a rolling three month cash flow budget that gets updated at the end of every month based on the actual and forecast cash position at that time, which gives you important indicators of what you want to achieve.”

Mr Peskett says understanding the basics of cash cycles enables management to judge the amount of working capital the business may need during the year.

“For small businesses with limited capacity to borrow or raise capital, cash flow management is critical for managing working capital, and understanding your business cash cycle is a major part of this,” Mr Peskett says.

“The cycle commences at the time where the business pays for the raw materials, actual goods or wages to cover services being delivered, to when payment is received from the customer. A delay in this cycle creates the need for working capital.

“If you can get money to move faster around the cycle or reduce the amount of money tied up, the business should generate more cash or it may need to borrow less money to fund working capital.”

By implementing a number of simple processes such as reviewing and stimulating more effective systems that deal with credit policy, billing procedures, stock levels, shipping, handling and borrowings, Mr Peskett says businesses should be able to take advantage of the basics of cash management.

“A business with $2 million in credit sales that reduces their average collection period of account receivables by 15 days, would free up an additional $82,000 in cash,” Mr Peskett says.

“This means you have a reasonable amount of additional money that could be used to reduce debt or be put towards supporting additional sales growth or investment.

“It also helps to maintain sustainable cash flows by selling excess stock, considering price increases, cutting overhead costs and selling non-core assets.

“Resisting the tendency to fall to ‘overtrading’, which is exhausting the business’s financial resources by growing too fast, is also just as important.

“The early warning signs of this include offering discounts for early cash payments, making part-payments and seeking additional overdrafts or credit lines.”


Marc Peskett can be contacted for comment on 03 9869 5900.

For all media enquiries contact Bruce Nelson on 0423 403 449.

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MPR Group

MPR Group provides business services and advice to growing enterprises.
Bruce Nelson
P: 0423 403 449


With tough economic times prevailing, businesses should be aware of the importance of healthy cash flow to thrive and survive through this period, according to respected accounting and advisory firm MPR Group.


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