Why Cashflow is Important

I could wax lyrical for hours about how important it is to maintain a positive cashflow, after all, the main reason businesses (of any size) fail, is because of poor cashflow.  But the reality is, the topic is pretty boring and would probably not hold your attention for much more than the length of this paragraph!

For many years now I have considered myself and those of us who work at Venta, to be more business advisors than accountants.  Not least of which because the latter just sounds so dull.  But the reality is I and my team spend most of our time coaching and assisting clients with the problems they face in running a business.  One of the key areas we have spent many hours advising and helping with is cashflow – the movement and speed of cash coming into the business and leaving it.  We have helped hundreds of clients overcome a poor cash position and in doing so, turn their businesses around.  However, much like the proverbial builder or mechanic, aside from making sure our compliance is completed and annual budget is done, I rarely had time to stop and look at my own business critically.

What is it they say?  Do as I say and not as I do?  I can make light of it now, but the reality is, I was and do face many of the same problems my clients face, I just took my eye off the ball for too long to recognise it.  And what happened?  A major (and I mean major) cash shortfall.  Now you might be asking yourself what exactly an accounting practice has as overheads which could create such a thing.  Clients pay when their work is done, and there are no really large expenses other than salaries and super, so what could have happened?

Well, it started with COVID – a fantastic opportunity for many accountants to grow their business, and we were no different.  Except our clients were hurting financially and started taking longer to pay.  A situation which in itself didn’t cause too many problems at first.  And we were happy to oblige, after-all, being kind to our clients meant they would be loyal to us, correct?  Well, I would never recommend this as a tactic to a client so I’m not sure why I accepted it as a business owner – because the answer is no, it doesn’t, not in the long term and usually just means you end up with what have become known to us recently as “Vampire Clients” (because they suck the life out of you for little or no return). 

Overall it was a situation we could manage as we knew the money was going to come in, it would just take a little longer to pay creditors and as the economy recovered, so too would the time it took our debtors to pay us, then life would return to “normal”. 

Much like other businesses, we have loans, well unsurprisingly, banks don’t approach their business clients with such a lenient attitude so suddenly we were having to make loan repayments without the cash to pay them.  ATO liabilities needed to be paid and we were struggling to make them, payment arrangements were entered into and I began to work more thinking that if I worked harder and for longer periods of time then it would bring revenue in the door quicker.

Except it didn’t, well, nowhere near fast enough.

On top of this, we had a staff member qualify as a Chartered Accountant which meant a large pay-rise, then we had a couple of staff leave, which meant large leave payments (not to mention the loss of bodies meant there was more work to be done by everybody else with recruitment hard to say the least), then just as I thought we couldn’t handle anymore, we had a particularly quiet January, which is always a quiet time of year anyway, but this one was quieter than usual.

Our debtors had risen astronomically, as had our debtor days, we were still making a profit, and the cash was coming, just not fast enough to actually pay the bills on time.  What a way to start the year, with stress levels through the roof, and I honestly wondered whether it was time to pack up and shut down.

All in all, this process took no more than 12 months to hit a point where it went from being tolerable to totally intolerable.  Not long in the land of business ownership.

So what’s the point of this story you ask?  Simply put, it’s that cash flow can make or break a business very very quickly.  Now that quiet January gave me a massive wake-up call, and a big opportunity.  For the first time since starting the business I actually had the time to sit down and take a good hard look at how we were functioning and make the changes needed.  12 months later and life has change immeasurably, there are some legacy issues we are still working through, but cash-wise, life is much much better.

So what has my experience taught me?  Well for starters, even though I’m a business advisor, I’m also a business owner and prone to the same problems every other business owner faces, I am not immune.  But the key learning would be to keep a close eye on things.  It’s not enough to do the annual budget (which we were doing and is a great tool), and keep on top of your compliance.  There are systems, processes, procedures needed to make sure the business can function healthily and sustainably and keep the cashflow positive.

But if I’m really honest, the biggest thing I have learned is empathy because now I can truly appreciate how quickly and easily positive cashflow can turn into negative cashflow and just how stressful (and soul destroying) it really is.  Its given me m mission:  to help as many businesses as possible overcome this hurdle and achieve what they set out to achieve.

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