Cash Flow Management; Cash is King.

Cash Flow Management; Cash is King.

Nick Crawford, Regional Director and Chief Financial Officer in Sydney, is qualified as a chartered accountant with extensive experience as a CFO in multiple different sectors. With over 20years’ experience as a CFO, we at The CFO Centre decided to question his knowledge on cash flow management.

What is the definition of Cash Flow?

There are two ways of looking at cash flow; in a set of annual accounts, you have a statement of cash flow and all it does is look backwards – it’s used to see how the business uses their money. In terms of our business (The CFO Centre), it’s a management term which measures, as one would expect, the inputs and outputs of the business. So, since the CFO centre is paid by a customer and uses that money to pay employees, suppliers etc. cash flow is the lifeblood of the business and, in the context that we’re talking about, it’s a tool that management use to make sure that that business keeps going.

No cash, no business.

How can having a good cash flow impact a business?

A good cash flow can impact a business in a couple of ways. Cash management is often very stressful for particular entrepreneurs who’ve set up a B2B (business to business/client). In Australia, a typical client is somebody who’s had a good idea, they’ve taken their business and is turning over 5, 10, 15, 20 million dollars but if they don’t have a sophisticated finance team behind them the ability to pay bills is a major concern. Therefore, having a tool that they can utilise, that states to them clearly where the cash-issues have come in and how to fix them, they can be confident in that their business will survive.

If you look at a business such as Facebook, for a number of years they made no profit. People believed in the platform and were pumping gas (funding) into it so, it kept going and look at where it is now. On the other hand, businesses who make profits but have no cash struggle because they can’t pay the staff, suppliers or invest money into the business. Very quickly, they’ll deteriorate due to the cash flow management issues. Cash is king and ultimately a business can’t survive unless it’s got positive cash flow.

What are the best tools and strategies for managing cash flow?

In terms of a strategic perspective, you’ve got to be robust but sensible. There’s no point in kidding yourself, it’s about using it as a tool to identify when potentially you’re going to hit a pitfall and you need to be able to deal with it. The other thing is also to be able to use it effectively. We’ve come across a number of people who use cash flow as a tool and then want to hide, bury their heads in the sand and not use it because it doesn’t give them the answer that they want to see, instead it identifies a cash flow problem.

What it might mean is you’ve got to go do something different; you may ask your bank for an overdraft facility, you might have to go to an invoice discounting facility to get cash quicker, if you’re in the growth stage of your business you might end up going to an external investor. So, it’s supplemented by other factors, like raising finance to make sure that you can keep your business going.

At The CFO Centre we have a model that demonstrates numerous brick walls that you’ll hit whilst in the different stages of your business. When you hit the second brick wall, cash flow would be a major issue because it consumes a lot of cash and often, you invest before you get the return. It’s imperative that people use a good cash flow tool to save money, to look at and predict the future but also manage within their means or identify the need to go out and find extra resources to get them through that process.

What you think is the best way of calculating cash flow for an SME that’s scaling up?

Cash inflows versus cash outflows.

It’s using the information you’ve got, typically the SMEs are not great at forecasting forward, a lot of it might just be what’s in front of them. It might be taking the invoices that roll to them and the invoices that they’ve got to pay, their payroll and using those to put together a realistic plan. It’s more about using the information around you and being sensible about it.

what’s the difference between a cash flow forecast and a cash flow statement?

A cash flow statement is something people put in their accounts. It’s a requirement, in Australia, for a company of a certain size to have to put a cash flow statement in. Basically, it takes the financial period that you’re looking at – which is split traditionally and historically – and you have to state what you did with the cash between the previous year and this year. ‘I paid employees, bought fixed assets, I invested in a that etc.’

A cash flow forecast is a forward-looking tool. The tax accountants and the accountants will do the cash flow statement (which is looking historically), whereas cash flow forecast is a forward-looking tool, but both are useful in knowing to grow the business.

Have you come across any examples of how clients have needed help with their cash flow?

Our Christmas holidays and our summer holidays coincide, so we have a period where if you’re a service-based business like The CFO Centre, you might not earn money for four weeks; but you’ll still have to pay staff, rent and ongoing bills. It creates a problem around March and April because of the quarterly tax (GST) – it’s like you’ve not had any money for two months and now you’ve got these big bills to pay back.

In terms of SMEs, I’ve come across some where they’ve not used cash flow as a tool; they’ve just continued to pay what’s needed when they’ve got money in the bank, they don’t foresee the problems coming along. Often the major problem is the ATO, if they did not pay the ATO they find themselves with a difficult issue that they can’t fix; they end up burying their heads in the sand and hope it will go away – it doesn’t. I’ve had clients where I’ve had to dig them out of a deep hole with the ATO, which showed me how vital cash flow management is needed by every client that we deal with.

I have one client who gets paid in advance, so they have positive cash flow. They’re probably the only one as they get their money up-front, it’s a different sort of cash flow management – it’s about investment to make sure you maximise the returns you get on your cash balances. Most of the businesses we work with do the service and get paid afterwards, so cash flow management is just a key management tool, particularly in the space that we, as The CFO Centre, work in.

What’s the best bit of advice you can give to small business owners to improve their cash flow management?

I think, in a lot of instances, they don’t usually do it, I think it’s a tool that people choose not to or maybe don’t have the skill set to use accurately. I think the best sort of advice would be to follow what the forecast is telling you. You can’t just ignore a problem, you need to react to what the issues are with the best solution (borrowing money from your bank, talk to people like us at The CFO Centre etc.).

It’s no different to us as individuals, when you get to a point when you want to go out on a Friday night and you’ve no money, you can’t do it. Businesses will not have a good cash flow management if their cash positioning and financial management is under-performing. Again, cash is king, if you do not have enough cash or the strategies in place to predict issues like low cash flow, then you need to look into solutions that line-up with your business plan and payment methods.