cash flow management Archives

This week, the world reels from the sudden and unexpected loss of singer David Bowie to an 18-month battle with cancer. He kept his illness a secret, releasing his final album and then celebrating his 69th birthday just a few days before he died. All over the globe, fans are playing his songs in remembrance of the Rock’n’Roll great. Many compliment his lyrics as thought-provoking, some claiming his words find meaning in their own lives. And, if you read it right, the first verse of his hit song ‘Changes’ can even be applied to the world of finance.

I still don’t know what I was waiting for
And my time was running wild
A million dead-end streets
And every time I thought I’d got it made
It seemed the taste was not so sweet
So I turned myself to face me
But I’ve never caught a glimpse
Of how the others must see the faker
I’m much too fast to take that test.

Any accountant or business owner will know how it feels when “every time you think you’ve got it made, the taste is not so sweet!” It’s that feeling of thinking we have enough cash to fill our obligations, and then a debtor defaults and we fall short. We all know the feeling of trying to “turn ourselves to face ourselves” and not being able to catch a glimpse because we’re “too fast”. In the world of cash flow, it’s when we’re spending faster than we can bring money in, and the business is running to catch up with our projections. In short, Bowie’s song masterfully sums up the challenges we face in projecting and managing cash flow in our businesses.

So how do we proactively manage our cash flow instead of meeting “a million dead-end streets”? Here are a few ideas to keep it coming in steadily.

Agree on payment terms upfront

Healthy cash flow relies heavily on knowing – and agreeing on – clear payments terms with your debtors. Suzannah Nichol, chief executive of construction industry body the National Specialist Construction Council, told the Guardian small business network: “”If you don’t start off knowing what your payment terms are, it is difficult to know when you are going to get paid, ” she says. “If you don’t know when a payment is overdue, how are you going to manage your cash flow?”

The type of business you run will determine what kind of payment terms are appropriate. If you sell goods, cash on delivery is a reasonable request. If you provide long-term consulting projects, 50% upfront could be requested, with the remainder to be paid on completion of the assignment.

Work out your breakeven point

This tip, given by Quickbooks, is touted as a good starting point for goal-setting. “You should know when your business will become profitable, not because it will affect your cash flow — because it won’t — but because it gives you an early goal to strive for and a ready-made target for projecting future cash flow. Negative cash flow and negative profits make for a grim combination. Focus your efforts on managing your cash flow with an eye toward reaching that moment when you realize your first profits,” they advise.

Set cash flow targets, and measure against them consistently

This involves looking ahead to the next six to 12 months and projecting what the company will need, taking into account seasonal fluctuations in demand, the need to pay out bonuses at certain times of the year, and so forth. One of Bowie’s 2013 hits was entitled “Where are we now?” Managers would do well to keep that question top of mind when it comes to cash flow. Some financial controllers advise updating your actual cash flow records weekly in order to have an accurate, ongoing sense of expenditure.

Maintaining a healthy cash flow for your business not only gives you peace of mind but ensures longevity for your business. If you need assistance managing your cash flow or putting a good system in place, contact The Finance Team. One of our trained, highly qualified finance executives can assist your business for the period of time that you need them.

Image credit: © Laurence Agron | Dreamstime.com

Paying tax is kind of like brushing your teeth:

You’ve got to do it (read: pay it) before you leave in the morning (before you expand the business or do anything else)
It’s an inconvenience that slows down your day (or company growth)
It creeps up just as you’re settling down for the night (read: month end)
But if you don’t do it, no one really wants to get too close (do business with you or be employed by your company) and you eventually find yourself in a spot of bother. (think dentist bills … and/or investigation by SARS for tax evasion!)

There are very few of us who haven’t cursed the tax man at one point or another. He eats into your cash flow, carves away at your savings and generally makes doing business more expensive. But he’s here to stay, so it’s worthwhile learning a few tricks around minimizing your tax requirements and maximizing your cash flow while still complying with the law.

Structure your company right.

The way in which your company is structured can mean the difference of thousands of rands to your tax bill each month. Many small businesses falsely believe that they will be liable for the least amount of tax if they trade in their individual capacity. An Mweb entrepreneur article makes this point: “Whilst many small businesses still trade as sole traders or partnerships, the majority would actually pay less tax if they converted to a company.” The key, it advises, is to structure the company or close corporation so that it can take full advantage of the tax saving benefits of a “Small Business Corporation”. As a guideline, if your business fits the following criteria, you might consider structuring it as a Small Business Corporation.

If your annual turnover is less than R20-million
If not more than 20% of your revenue is derived from investment income or “personal services”
If your shareholders (or members) are all natural persons and do not own shares or interest in any other company or CC

Claim back for maximum expenses.

Give your cash flow a boost by making sure you claim back for all the expenses that are due to you. If you’re a sole proprietor working from home, you can legally claim for a range of things, such as part of your mortgage bond interest, telephone bill, and entertainment and motor vehicle costs. However, you need to be able to prove to SARS that your business generates a small income and that it has prospects for making a profit in the future.

Spread the income amongst family members.

An easy way of increasing cash flow (and decreasing tax payments) in a family-owned business is by splitting the income between partners or husband and wife. If your partner is a legitimate employee of the company, you can share the load by splitting your income evenly. Standard Bank gives this example: Mr X draws a salary of R250 000 from his CC, and pays income tax of R45 504,00, leaving an after-tax income of R204 496.

If he employs his wife and splits the income equally between the two of them, the total tax bill is R25 488 (R12 744 each). This leaves the family with an after tax income of R224 512 – a saving of R20 016.” Note that both spouses or partners need to have functioning jobs at the company in order to make use of this option.

Driving your cash flow up and your tax payments down takes an in-depth understanding of tax and corporation law, as well as a working knowledge of what money flows in and out of the business on a monthly basis. If you’re looking for a specialist to come in to advise you on these matters, contact The Finance Team. Our associates are qualified, experienced finance professionals who can provide you with in-depth advice as and when you need it.

Image credit – financetipss.com