In response to an episode of the My Business Podcast, in which we spoke with accountant Alexander Laureti of LMS Advisory about managing business cash flows, a My Business follower posed this question:
“Why do many/most tax professionals not include the cash flow statement in an SME financial report? I believe that the cash flow statement is the easiest financial report to understand.”
We asked Mr Laureti to respond, and this is what he had to say:
“It’s an interesting question!
“The first reason is that cash flow statements commonly seen in SME financial reports are only compulsory for larger business known as large reporting entities. There is no obligation for cash flow statements to be prepared for a smaller business, which helps them keep compliance costs down for their smaller business clients. They can certainly ask for them, and most, if not all, accountants would be able to prepare one, but it would be additional service.
“The second reason is that cash flow statements can be fiddly to prepare and require proper configuration in advance to classify what are operating, investing and financing activities. To understand what the reports are telling you requires assumed knowledge in order to allocate what business expenditure goes into each category. I agree that they are very useful tools to an organisation – if you understand them and they are prepared correctly.
“What I would recommend to you is to have an open dialogue with your accountant on a regular basis, to let them know exactly what you want to know about your business in real time. Understanding business cash flow is vital. Remember: having a cash flow statement prepared for you six months after the end of the financial year does not always provide the best information for you to make good decisions. Financial statements only give you a historical record of how the business went. A lot can change in the meantime!
“I recommend you work with your accountant, bookkeeper or even keep your own record of your cash flow so you can predict when times will be tough. You can also plan on whether to reinvest in the business or take additional salary from the business when cash flow is good to reward yourself for your hard work.
“A great tool for this is the various cloud accounting platforms which allow bank feeds to be automatically active and flowing into your file. You can know your cash position daily and share this information with your whole management team. I believe that real-time reporting has been a real difference-maker in allowing business clients and their advisors to work together to solve issues before they become huge problems. There are time savings and better business intelligence to be gained.
“If using the cloud is not for you, there are also resources on websites such as business.gov.au, which have great tools and templates to keep track of your business. These templates are also called a cash flow statement, but look very different to the financial reporting format listed in annual financial statements. If you have a cloud accounting platform that is well structured and kept up to date, you will have great information to run reports direct from the software or fill in a separate template in your own time.
“If you set in place a budget for your business and a cash flow statement, get timely financial statements prepared for you that are explained clearly, and always strive to lodge and pay your statutory obligations on time, you’ll have all the tools to be very successful in business. A great team of advisers who care about you and your business can help you achieve this.”