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".
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