Part of my job involves sitting down with business owners to discuss how their business is performing. Often, we come to a point in a meeting and the owner asks, “well then how come there’s nothing in the bank account?” Usually it's when we get onto talking about the tax to pay. It’s a genuine question - but often betrays a lack of understanding about where cash disappears to.

Now there are many answers to that question but I’m just going to talk about three key ones.

One. You’ve spent it on assets. I’ve got a few clients who fall into this trap. They spend current year profits on things that will last several years (often vehicles). They think the money is in the bank now so I should save myself some interest and pay cash. So they do, and then come tax, GST, or PAYE time the cash isn’t there. As a rule, unless you have more cash then you need in the business you should be borrowing to buy long term assets.

Two. You grew and that costs money. Many businesses don’t truly understand what each dollar of sales costs them, and the timing of when they need cash in the business in order to make the sale – i.e. the true time between when you pay for stock / staff through to the time you get paid.

Many profitable businesses go broke, because they fail to appreciate how long it can take to turn those ‘great sales orders’ into cash in the bank.

Three. You never had a plan in the first place. A lot of NZ businesses do not have a rolling cashflow forecast. Not only do they not have a forecast they don’t even have a clear budget. You can’t work out if the cash in your business is ‘good’ right now and that you can afford to pay for that new truck with cash if you have no idea what should be in the bank in the first place.

What can you do about it? Here's three ideas:

  • Make a plan. Every business should have at least a one-year (and preferably two) cashflow forecast prepared regularly so you can prepare for the cash squeezes ahead of time. It shouldn’t be a one-off job that the accountant does whenever the bank needs it and then it sits in your drawer.
  • Understand your business better. Work out some key drivers of cash in your business (i.e. average debtor days) and do something to improve the figures.
  • Educate yourself. You could talk to your accountant to understand more and find out if they are offering any workshops to help you learn more.

There are lots of ways to get better at managing cash and to learn how to avoid the running out of it. You don’t need to be an accountant to make improvements, and it’s amazing how small changes can have a huge impact on your bank balance.

Tom Beswick