Cash flow is an issue My Business comes up with again and again when speaking with business owners. Periods of low incoming revenues cause tremendous stress when bills fall due. And some also struggle to avoid the temptation to spend large incoming payments instead of setting aside portions of that to cover leaner periods.
So we asked Alexander Laureti, a partner at accounting firm LMS Advisory, for his top three tips on approaching cash flow in a healthy, sustainable way. Here’s what he had to say:
1. Keep a working budget
We’re constantly told how important budgeting is when it comes to our personal finances, but how many businesses also work to a formal budget?
“I think that a lot of business owners don't budget,” suggests Alexander.
“They know roughly what has to happen, but a lot of them get caught by surprise when, for example, the superannuation bill becomes due and payable. They know roughly that super is due at this time, but they're not quite sure how much it is.”
As a partner within his firm, Alexander knows first-hand how difficult it can be for business owners to plan their upcoming obligations on a regular basis. Yet not doing so can leave you scratching around at the last minute to find the funds to pay a particular bill.
“[As such] I think that it's very important for business owners – whether they do it themselves, whether they get involved with their accountant at least once a year – to set themselves a budget for the year ahead ... and really look at what bills you paid in the last year.
“You'll start to see a pattern of when things are due, which expenses always come up, and you'll start to then realise how much you paid on certain expenses, and it gives you the ability to then say 'is this the best spend of my business' money? Should I make some different decisions going forward? How much money do I have to put aside every quarter for superannuation?'
“The ability to better plan for that will hopefully take that stress off business owners.”
And a big part of ensuring your budget is workable, says Alexander, is not to rely on one-off payments and rebates to pay your bills.
“[For example,] nobody should really be relying on getting that [tax] refund in just before Christmas because they have to pay bills with it,” he says.
2. Diversify your sources of essential services (the old saying about having all your eggs in one basket)
“I think it's important not to be too reliant on information from one source,” says Alexander.
“If you're not completely reliant on one source, then you will not be affected as much if that source disappears. Using the all the resources that are out there [is a wise decision].”
Sometimes, though, you may be reliant on a particular source of information or key supplier because you simply don’t know of any others that exist. Alexander says this is where having a strong support network and referral partnerships can be worth its weight in gold.
“It's also important to have a good network, so if you're not sure what is going on with your business, or you need support, contact your accountant, contact your bookkeeper, contact your neighbour who has somebody who knows how to help you if you can't find the exact resources that you're looking for,” he says.
“At least they can help you find an alternate in this particular period.”
3. Pay the tax office first
Alexander says while paying the tax office is not a popular move, making it your first priority when it comes to paying bills is a really good habit for all business owners to get into.
“Pay the ATO first, because they are the most expensive debt you'll have,” he explains.
“At 9.5 per cent interest if you pay late, it is a costly yet avoidable debt to have on your ledger.”
He says the only debt even more expensive is “if you're paying your tax on your credit card, which is not advisable”.