“Balance Sheet items are where all your questions are answered about your cash flow problems or successes! Ever had a look at your sales figures and wondered “If I’m doing so well, why don’t I have any money in the bank??”; then chances are the problem is in one of these areas:”
- NET PROFIT MARGIN – Just because your revenue is increasing, doesn’t necessarily mean your profit is increasing. If the cost it takes to get the extra sales, or the discounts offered to get the increased revenue are too great, you could be like the proverbial dog chasing its tale; running around doing lots of work but not actually getting anywhere.
- DAYS RECEIVABLE/DAYS PAYABLE – Long payment terms for your customers and short payment terms for your suppliers can spell absolute disaster for your cash flow. In effect you are acting as a bank for your customers. Ensuring you have the right payment terms for Debtors and Creditors is crucial to your business. Actually enforcing those credit terms is another key issue; you need to have plans in place for ensuring your customers stick to their payment terms.
- DAYS INVENTORY OR WORK IN PROGRESS – This is the number of days, on average, between when goods are delivered to you by suppliers, or when your services are completed, to when they are delivered to customers. This is where your cash can be sitting, especially if you’ve had to pay for the goods before you’ve shipped them out to customers.
- SUPERANNUATION AND ATO PAYMENTS – Employee superannuation, GST, Payroll and Business Income Tax are drains on your cash flow that you won’t see in your Profit and Loss statement. It is absolutely critical to have separate holding accounts to squirrel away provisions for these regular payments so that you aren’t caught short when these bills fall due.
- LOAN REPAYMENTS AND CREDIT CARD PAYMENTS – Credit card payments and loan repayments for working capital or business loans are another drain on your cash flow.
- DRAWINGS – Generally Drawings from the business are treated as a Balance Sheet item and won’t show on your P&L so this can affect your cash position as well.
