are you financially well organised? Business Plan financial management systems

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1 are you financially well organised? Business Plan financial management systems

2 Financial Management Systems Have you ever heard the saying cash is king? Cash flow is the lifeblood of any business. Too often excellent businesses fail because their Financial Management Systems cannot cope with their growth and expansion strategies. At the same time, businesses outperform expectations because their growth strategies are supported by sound financial management. Without cash you cannot: 1. Payout profits to owners 2. Invest in new products and services 3. Pay your expenses 4. Purchase new assets 5. Pay your liabilities 6. Achieve your business goals and objectives If cash flow is the lifeblood of a business, Financial Management Systems are the heart, arteries and veins that pump cash around the business body so the business operates without illness and disease. The two Core Financial Management Systems for any business are: 1 Profit and cash flow plan 2 Timely and accurate reporting For a business to be successful, it must: 1. Ensure that it measures its profit and cash flow monthly, if not weekly or daily; and 2. Ensure that the financial information is accurate and provided in a timely fashion so the key people in your business are making decisions based on sound financial information My business has made a significant profit for the year, how come it doesn t show in the bank account? There is a difference between profit and cash. Take a look at the following product sale diagram.

3 30 days 15 days 45 days purchase stock/expense pay for stock/expense make a sale recieve cash In this example, the time between purchasing stock/an expense item and receiving the cash is 90 days. However, the profit is recorded 45 days after the sale is made. The fundamental focus of any profit and cash flow plan is to ensure that the time between receiving the cash and purchasing the stock/expense item is kept to a minimum, aiming to receive the cash before you purchase the stock or expense item. You might think this is impossible but there are plenty of businesses that do it. Think about the following. If you build a house, does the builder require a deposit when you sign the contract? When you buy a new pair of shoes do you have to pay for them before you leave the shop? If you go on a holiday, do you have to purchase your plane tickets before you get on the plane? Most successful businesses bring this gap between stock/expense purchase and cash receipt back to the bare minimum, and doing so means improved cash flow. This is called the cash gap (the time between the initial stock/expense purchase and sales cash receipt). A profit and cash flow plan helps you understand the impact that the cash gap has on your business. This plan must be prepared for every business annually. Ideally, the co-ordination of this plan should be done by the person who is responsible for the expense area of financial management, and who has a clear understanding of the business expenses and margins. The profit and cash flow plan must be supported by 12 month action plans for each revenue and expense area of the business, which includes strategies to reduce the cash gap. The overriding principle is to increase the profit and reduce the cash gap. The results should be measured against the projections on a monthly basis (at least), with the projections recast quarterly until the end of the year. The action plans for achieving targets must be reported on, updated each month and measured against the key outcomes required for each area. These key outcomes are referred to as key performance indicators.

4 From a Financial Management System perspective, some key areas to focus on in developing any profit and cash flow plan are: 1. Ensure all sales are trapped and invoiced so the business knows its exact sales numbers, how much is owing by customers, and for how long it has been owing. Ensure that customers pay within the terms and that the money is deposited into the bank account promptly. 2. Ensure business expenses are managed within budget, all bills are identified so the business knows how much it owes to its suppliers, that suppliers are paid on their terms, and appropriate controls exist to minimise expense risk. 3. Ensure that the stock is purchased in a way that you can maximise margins on sales, and excessive stock is not held so cash is unnecessarily tied up in unsold items. 4. Ensure the payroll is managed and employees are being paid correctly. Timely and accurate reporting Like any business process, garbage in = garbage out. You must ensure that the appropriate care and attention is being paid to your financial reporting systems. Business decisions are often made by owners on a hunch. They often perceive the financial situation to be different to the reality. They implement a marketing and sales campaign to drive the revenue up, but the cash flow systems aren t working to manage the growth. While their profits might increase, so will the cash gap. The financial ramification of implementing such a plan must be known from the beginning, so the cash flow can be managed to support the strategy. For you to delegate decision making to others, you must ensure they are provided with accurate and timely information so they can make accurate and timely decisions. As a minimum, you should ensure that your internal Financial Management System is computerised and can provide: 1. An accurate balance sheet and profit and loss statement. If you don t know what these are, you need to implement a Financial Management System in your business quickly. 2. A list of customers that owe you money and details of how much they owe and for how long they have owed it to you. 3. A list of suppliers that you owe money, which details how much you owe and for how long you have owed it to them. 4. A list of employees pay and entitlements you owe to them such as holidays, sick leave and long service leave. 5. Accurate information on what stock items you have bought and sold, and the cost of what is in stock.

5 These systems can be purchased over the counter, but you should consult an accountant to make sure you select the correct one to meet your needs. You must then ensure that your key people are appropriately trained or have the skills to use it. Remember this: Garbage in = garbage out Garbage out = poor decision making Poor decision making = dysfunctional business Dysfunctional business your ideal day at work Summary Remember that the two core Financial Management Systems for any business are a profit and cash flow plan, and timely and accurate reporting. A business must ensure it measures its profit and cash flow monthly, if not weekly or daily, and also make sure that the financial information is accurate and provided in a timely fashion so the key people in your business are making decisions based on sound financial information. become financially well organised. Call FWO Chartered Accountants today on Or info@fwo.net.au

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