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Insight, news and updates from Alliott NZ Chartered Accountants, Auckland New Zealand. The views expressed here are the views of the author and should be discussed in further detail should an article be relevant to your individual circumstances.

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Managing cash flow Pt 1

Written by Vanessa Williams on September 14th, 2017.      0 comments

Get better at managing your receivables

If you offer credit to your customers, what are your terms of trade?

consultant-584It’s a question we often ask, and the response from the business owner is typically 7 days or 14 days. And yet, when we do a simple calculation to understand days in receivables, more often than that the result is much higher than that.

To calculate your days in receivables, pull out your latest full year financial statements. Turn to the balance sheet, and note down the figure shown for accounts receivable or trade debtors. Let’s assume that number is $127,000. We will label it A.

Next, look at your total sales in your profit and loss account. We’ll assume that number is $500,000 and we’ll label that B.

The calculation for days in receivables is now A/B multiplied by 365. So in this case, 127,000/500000 x 365, which equals just short of 93 days. What that means is despite your stated terms of trade of 14 days, it is actually taking your customers three months on average to pay your invoices!

This is not uncommon

Do your own calculation, and if the number is too high, give someone on your team the task of rigorously following up your customers to secure payment more quickly.

In the case of the calculation above, every day by which you reduce the days in receivable will free up close to $1,400 in cash. So, even if you get it down to 50 days — still not even close to your terms of trade — you will find your bank balance is boosted by approximately $60,000 relatively to where it would have been had you left the number at 93 days.

Set money aside to pay tax

Goods and services tax (GST) can cause problems for small business owners because of the way they operate.

Essentially, when you make a sale (and assuming you are registered for GST) you collect the tax on top of your sales price and hold that for a period of time before remitting it to the tax office on your GST return.

If you find yourself consistently short at tax time, consider opening a separate savings account to hold GST until it’s due. This can also be done for income tax payments.

Prepare a detailed cash flow forecast and budget

If your business is seasonal or prone to cash shortfalls, talk with Alliotts in Auckland on 09 520 9200 about a three-way cash forecast and budget.
What this means is that you forecast out month by month, line by line, your profit and loss account, cash flow forecast and balance sheet to make sure everything is accounted for.
Then, really importantly, monitor this monthly against actual results. That way, if something does go awry, you can take action before it’s too late.
 

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