A rather disturbing feeling hit me today (and it wasn’t yesterday’s Chocolate Mud Cake that my daughter fed me – remind me to tell her that the cake should be made out of chocolate!)
No, my disturbing feeling emanated from a conversation I had with a business acquaintance of a family friend (some Aunt’s former lover’s first cousin, twice removed, who now runs a small sporting store – well you get the picture anyway).
Trevor (real name hidden to protect his stupidity) was in some financial distress as he had to pay GST to the Australian Government but had spent it all and was now trying to work out a repayment programme with the Australian Taxation Office.
“How did you spend it all?” I asked.
“Well, you know, the house renovations were costing more than I expected and I needed some quick cash, so I drew it out of the company. You know how it is” he replied.
“No, I don’t” I responded, “but surely you knew this would leave you in a pickle. Didn’t your cashflow forecasts show you this was coming-up?”
“Well, I did prepare those things but I don’t really look at them” he replied.
A number of suitable responses filled my mind at that stage but I contented myself with telling him he should try to repay the money as soon as possible to the ATO and get out of their bad books.
It constantly amazes me that some business people ignore the basic fundamentals of running a business. What’s more infuriating in this case is that Trevor had run his business for 12 years and had a constant turnover, so he should have known what were the critical “cashpoints” of his business.
“Cashpoints?” I hear you say, “What are they?”
“Cashpoints” are what I call those times of the year where your cash requirements are abnormal or extraordinary.
To give you an idea of what I mean, I have listed below the most common types of outgoings that people seem to forget about when planning for cash needs or would like to forget about.
1. Net GST payments (Remember, this is not your money, it is the government’s);
2. Quarterly PAYG/IAS payments (This is payment of your income tax obligations);
3. Depreciable equipment (This is replacement/upgrade of furniture and equipment, computers, faxes, printers, etc);
4. Professional fees (A biggie! In more ways than one. Having a new lease drafted? You need a lawyer. Getting your businesses tax return done? You need an accountant. Buying a business for about $200,000 or above? You’d better allow for a few thousand dollars in professional fees).
The biggest problem most businesspersons have is thinking solely about the direct inputs into their business and not looking at peripheral costs. Some businesspersons identify relevant costs but underestimate them, in the hope of making the cash budget “look good”. This is why those businesses experience cash flow difficulties and find themselves having to pull a rabbit out of the hat, down the track.
A cashflow forecast is not undertaken to make anything “look good”. It is undertaken to give YOU, the owner a realistic view of one aspect of how your business will perform.
If your cashflow forecast looks horrible, isn’t it better to know about it now rather than when your business hits financial difficulties?
As they say “cash is king” but you don’t want to make the lack of it turn you into a “joker”.
Craig Wood has been a business consultant for 20 years, assisting home based business owners to ensure theirs is one of the best home based businessess it can be.
See why home based business owners are rushing to receive Craig's monthly tips and strategies by visiting http://www.homebusinessknowledge.com .