Australian Furniture Association Partner, XETA Accounting, is on the money. ‘We’ve been through the wringer for a while. Things haven’t been easy since the Global Financial Crisis in 2007/2008, and just as the world began recovering, COVID hit us all. The fact that we have such interconnectedness meant that a ripple in Asia would be a tidal wave in the Americas; dominoes falling in Europe eventually topple over walls in Africa. Australia is an island, but it’s not that isolated.’
We’re intimately connected across the globe, so changes in USA Federal Interest rates eventually hit us too. Servers overseas fail due to a software update, and we’re all trapped in Tullamarine without a flight home. Wars are ongoing, impacting people in terrible ways, and resources are always scarce. Everything is difficult, but we push through.
With this in mind, how do we run our businesses in Australia when the rest of the world impacts us so profoundly?
Money is a sore topic when it is needed. When there’s lots of money, people become complacent. How do we position ourselves to manage our cashflows to form resilient businesses with the agility to exploit opportunities quickly?
Everything has changed, but nothing really changes. The sun comes up every morning and we gotta keep moving. Breakfast on the run, take the kids to school, get to the office and clear out those emails!
Rinse and repeat. We’re running on treadmills, and not going anywhere… it seems.
The phrase I hear the most from business owners is:
“My Profit & Loss Report looks so good… but why is my bank account so empty?”
XETA helps hundreds of businesses, and thousands of people. We can see the bank feeds, the profit & loss reports, the balance sheets and all the tax data. With his level of access to a cross-section of the Australian economy, we’re able to benchmark it all – and analyse what makes some businesses more successful than others. Something not inherently apparent is why two businesses can be so different – Company A has $500k sitting in its bank accounts, while Company B has $20k…. but the companies are extremely similar in many areas. Why would two businesses which are basically the same have completely different results?
There are many factors impacting businesses in Australia right now. High levels of competition, and customers that are being squeezed by the economy – RBA rate hikes and big layoffs make it hard for individuals to save, let alone use their income to purchase goods. Fair Work and labour costs, combined with the relative scarcity of good quality labour makes it difficult for businesses to hire. Materials and associated costs (freight, cartage, duties etc) significantly push up the Cost of Goods Sold. ‘Techno-Feudal-Capitalism’ is a drain on the economy in some people’s eyes – the digital online marketplaces are adding costs to the suppliers AND the end customers without really adding value to the products they provide the marketplace for. All these intersecting challenges make it harder and harder to do business or be sustainable in the long run.
One phenomenon we’ve noticed is that people are tired. The high cost of wages and theadministrative/legal requirements relating to Australian labour means that companies are more comfortable taking on more work on their already-at-capacity team, because the marginal cost of hiring an additional pair of hands is more expensive than just doing 50-60 hours a week yourself. Business owners are working far more hours than ever before, and the warehouse/office/logistics teams are regularly doing 10 hours a day, overtime unpaid. This can lead to burnout, sure, but thelack of breathing space actually kills innovation and ideas more than anything else.
And yet despite these hardships, a lot of businesses are THRIVING. Despite all the heavy duty lifting required, a lot of our clients are growing and needing new tax planning strategies to help them deal with surplus profits and new opportunities.
Our team considered this for a while – Company A was thriving, but Company B wasn’t. But both companies were basically the same – again, what made Company A so successful?
And the answer is: CASH FLOW MANAGEMENT.
It’s not a new concept. The company stopped running on the treadmill for one week and took a breath. We sat with them and started from the bottom up. We reviewed each cycle, all their systems and controls, and ignored the conventional method of using the profit & loss report to see how they were doing.
Most accountants and CFO’s know that accounting profit isn’t “real” profit. The reality is that the bank account is real. Your products are real. Your customers and suppliers are real. Believe it or not, the ATO is real.
Nobody spends that much time on the Cash Flow Statements, and many companies in Australia don’t even produce them – it’s not a mandatory reporting requirement, especially if you’re a special purposes reporter. Companies on the ASX are generally required to prepare Cash Flow Statements, and maybe some audited Pty Ltds, but mostly nobody else is doing them. It’s also because this can be a highly manual report – not too many accounting systems/ERPs provide Cash Flow Statements out of the box. Strangely enough, the cheap and cheerful XERO system has beautiful Cash Flow Reports, and these can be highly customised over and above their standard generic format, but even the basic XERO Cash Flow reports are excellent.
The reason why it’s so important to use Cash Flow Reports should be self-explanatory, but you’re forgiven if you’re not. Your accountant is probably not providing this in the first place, and if you’re not using Xero it’s not readily available in the first place.
BUT it’s the only place you can see all your actual bank transactions displayed in a way to show you what’s happening on a daily, weekly, fortnightly or monthly basis. We recommend using a time period of weeks so that you can map your actual results against your quarter – 13 weeks lines up with your BAS.
Monthly statements show you how you’re moving, even if some months are 4 weeks versus 5 weeks. And yearly reports show you exactly how your business fares from year to year.
More importantly, the reason the profit and loss looks great, but the bank account might not, is because your balance sheet payments (money paid for things that don’t show up on the P&L) are actually included.
As an example, if your P&L showed a profit of $24k for the year, but your bank account was $0… it’s because the fleet finance cost for your delivery vehicle was $2k per month. Those monthly finance payments aren’t deductible for tax or expenses… they’re cash settlements of a liability. In this example, all your profits were quietly spent on finance repayments that never showed up on your P&L.
The same concept applies to BAS and Super. Your P&L report never shows GST – all your transactions in a P&L are GST-exclusive. Your superannuation expense is close to reality, but theactual payments of super are sometimes only made 28 days after the end of a quarter.
If you are not actively managing your compliance cashflows, then your P&L is always out of sync with your bank account by at least 28 days.
And what about customer collections, or accounts payable?
If your sales or purchases are on 30-day terms, then it’s quite possible to have sales revenue of $100k this month on your P&L… but there’s nothing in the bank.
A proactive approach should be taken.
1. Set up your cash flow reports in your accounting system or in MS Excel.
2. Understand your cash collection cycle – all your sales terms and customer data tells you when a sale is expected to arrive.
3. Use all the terms available to you for accounts payable. Stick to your due dates where possible, and honour your relationships with suppliers and regulators. These are the inputs your business needs to make sales in the first place.
4. Record all your finance cash flows and understand their implications – credit card accounts, credit facilities, vendor finance/equipment finance, etc. All of these are external to your P&L, and if you don’t have them listed by item/category, you’ll never know where your money is going.
- Use high interest-bearing accounts to save for your GST, PAYG and Super as they happen. Don’t wait for the quarter to end before you scramble and search for money to pay theBAS/Super when those original transactions already happened 90 days ago.
- a. On this note, check with your Tax Agent if your basis of accounting for GST is appropriate for your business!
- Have you got the right mix of team members relative to your operations?
- a. Do we have 3 people working in accounts payable, when you only need 1 person?
- c. Do we have more cost centres than profit centres?
- b. Are you using your systems and tools to the full extent of their capabilities?
- Are all your processes and standard operating procedures documented?
- a. You’ll be surprised how many businesses don’t have anything to show.
The successful businesses we see are the ones that focus on cash flow reporting and plan their cashflows ahead 13 weeks at a time. They know what’s coming up, and use their AR/AP to estimate their biggest cash flow drivers.
There’s no reason you can’t create a quick cash flow budget using your last quarter as an estimate for the future – and you can project your future cash on hand based on this quite easily.
I’m not saying that you should abandon your management accounts, your standard P&L or your balance sheet. I’m telling you that you should tailor your Cash Flow Statement to bring everything together, showing you how you’re actually doing.
You’re going to see things you never saw before, and it’s only going to make you and your business better.
Cash is king, right?
Zander De Klerk
Zander De Klerk is the Managing Director for Sydney & Melbourne and leads the CFO and Advisory area for businesses across Australia and overseas.
Working in CFO leadership, tax structuring and business process optimisation with all types of businesses, Zander helps owners and groups with grow their businesses and adapt to changes impacting them, including financial turnaround and mergers/acquisitions.
Daniel de Wet
Daniel de Wet is the Managing Director for Queensland, South Australia and West Australia, and provides complex tax and finance advice to all XETA’s clients. Daniel has helped structure family businesses, manufacturing groups and individual tax ecosystems for all our clients and has saved them a fortune in taxes through intelligent, correct and optimized tax planning. All business owners in Australia have resources available at their disposal when it comes to tax and cashflows, and Daniel guides them through the best tax structure and cash flow management, growing profits for the owners and minimizing obligations and liabilities.