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James Solomons

Accounting, Business & Technology; Advocate, Entrepreneur & Educator

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Cashflow Controls

Back to Basics for CFOs

Exclusively published here at The CFO Magazine on June 15, 2020 https://cfomagazine.com.au/back-to-basics-for-cfos/

Read Time: 3m 30s 

The pace of change at the end of 2019 was ever increasing. But few could argue that the speed at which change was forced upon the entire world over the past 4 months has been nothing short of unimaginable. If predicting pandemics is something only the likes of Bill Gates can do, how could even the sharpest of CFOs have had any chance to ‘forecast’ this sort of economic shutdown. 

What airline CFO would have dreamed that almost every plane in their fleet would be grounded, not able to generate revenue. How does someone park that much cash away in a ‘pandemic fund’ to be able to survive. For businesses with their wings clipped, but not in the magnitude of airlines, what could or should they have done to protect against this. What will they teach at university in the years to come as they consider why some companies failed and some survived.

Without downplaying the decimating impacts of Covid-19, the answer is quite simple. It is getting the basics right. Whilst we may never see a pandemic like this again in our lifetime, it is this writer’s opinion that ‘business as usual’, according to the finance team, will be very different moving forward.

Certainly for the astute readers they will know that cash is king. Every business is different but the core underlying metrics that apply to every business always comes back to liquidity.

And so, messaging to the rest of the business in what will be ‘the new normal’ could look something like this:

To protect, as best we can, against something like this happening again, we will be building a pandemic fund. We will do this by shaving a % off all spending budgets for the next few years. Our focus will be on generating at least the same revenue with slightly less investment and if we achieve this, we can re-invest some of the profits into increased spending budgets. Please submit your revised budgets for review by 30 June. Kind regards, your very stressed out Finance Team

Of course, this may, indeed, it probably will, be met with fierce competition with arguments centered around capturing an opportunity in a recovering economy. But now more than ever, the focus must be on the basics of fiscal responsibility. No doubt it is going to be a balancing act.

But isn’t this just the basics you say. Wouldn’t all businesses be operating this way? Well, the impacts of the pandemic on businesses have proved many are not.

There are always outliers in this discussion, like startups who knowingly spend more than they earn until cash flow breakeven is achieved, but they more than any other business have to understand their cash flow runway. Hence why many businesses may have reverted to the ‘start up’ approach during this pandemic.

And so, a non-exhaustive list of basics to consider is:

  • Cash is king, so what is your runway if you saw a drop in revenue of 50% either overnight or gradually over 6 months. Could you survive for 6-12 months without major cost changes? If not, what changes will you make to protect cash
  • In normal operating conditions what cash flow metrics & indicators are you tracking and what happens when one falls below target? How do you recover lost cash flow?
  • Are your systems & tech up to scratch to find cash flow issues quickly so they can be addressed?
  • What is driving decisions in the business? Gut, historical data, forward forecasts, or something else. There is a place for taking risks, but even these risks are supported by numbers.
  • Are your pricing models properly incorporating all costs, or is it conveniently forgetting your sunk, opex and other costs? Is this approach sustainable?
  • Is your finance team humanising the numbers? Most divisions outside of finance tune out when metrics appear in a busy spreadsheet. What is your finance team doing to translate the numbers into a language every division can understand?

If you can’t answer these questions, or if you know the answer and it is not what it should be, then now is the time to use the pandemic as a catalyst for change to get the basics in order.

 

 

 

6 practical steps to introduce advisory services in your firm

The next phase of the accounting industry — where accountants become true advisers to their clients and not just data hoarders — is very much underway.

But it’s often difficult to know exactly where to start, and what changes to make to help that transition. Having made that change myself in recent years, with a practice of 150+ business clients and growing, here are some practical tips for any firms looking to fundamentally change the way they approach advice.

Let the technology do the heavy lifting
Continue reading “6 practical steps to introduce advisory services in your firm”

A look into the possible future of banking….it is nothing like we know now

(Picture credit: Moven)

I came across this article today by Brett King on Medium. It just proves that the way we think about things and the way we consume things is always going to change in ways that we never thought possible. And it just happens without us even realising it. As I always say, our habits just change.  A great read.

https://medium.com/@brettking/the-death-of-bank-products-has-been-greatly-under-exaggerated-153cdb21a5d4#.4ovhorgbl 

The Importance of Credit Control in your Business

Businesses don’t fail because of a lack of profit…they fail because of a lack of cashflow ! Here are 5 simple tips to develop a credit control policy when extending credit to your customers via BRW

http://www.brw.com.au/p/leadership/how_to_develop_credit_control_policy_gxoFVWLHxezQe33G51Rj5L

2015 cash flow forecast…have you done yours yet ?

My latest blog post on the EFS website

http://efsstrategic.com.au/prepared-2015-financial-year-cash-flow-forecast/ 

What are your business’ values ….?

As published in the November edition of the Western Sydney Business Access magazine http://westernsydneyaccess.com.au/
Every business has a set of core values underpinning most, if not all of the actions and decisions that its owners and staff make on a daily basis (even if they don’t know what they are).
Successful businesses know what these core values are and have spent time developing them, modifying them and operating within them to maximize their chance of success.
Businesses that don’t know what their core values are, generally speaking are those businesses that have underperformed because their values are not aligned with the goals and objectives that they may or may not have set.
The ‘values’ and ‘practices’ in a business are what are defined as the culture of the business. Those businesses which have an adaptive culture which is shared and communicated between owners, staff and the public create an opportunity to give themselves a point of difference over their competitors.
So how do you turn a business’ values, practices and overriding culture into business success and more importantly for business owners, long lasting success and profits?
The key is to turn theory into practice. You can have the best set of corporate values written down on paper, but if these values aren’t followed they won’t transpire into a high performing culture.
It all starts with the owners. The owners of any business are the natural leaders of a business. Not all owners are the best ‘leaders’ however they still have to go about their day to day affairs using the values of the business as the framework for their decision making.
The owners will be responsible for defining the values of their business with or without input from their staff. The owners then need to communicate these values to the staff and make it very clear that these are the values of the business that have to be adhered to.
It is here however that many businesses fall down when non-conformity with these values is left unaddressed. Owners have to quickly deal with staff that don’t follow the values because it only takes one or two bad staff to bring the entire culture of the business down.
In comparison to non-conformity, adherence to the values can help to create a culture that encourages and inspires employees to take responsibility for the business and focus their efforts on achieving the shared goals of the organisation.
This is the beginning of the creation of a high performing culture, in part determined by the businesses values and can assist with reducing employee turnover which helps to improve a business’ profitability.
Taking a step back in the process the defining of the businesses values is an integral part of the planning process and is also a valuable marketing and reputation building tool.
I have talked in previous articles about risk management and the importance of business planning to give your business every chance of success. Well, defining the values by which you want to operate is really the first step in the planning process.
These values find their way into a SWOT Analysis….i.e. Strengths and Opportunities and how a strong set of business values can be a competitive advantage.
These values are part of risk management……i.e. What is the risk to the business if we don’t undertake our business dealings in line with our publicly communicated values? Client losses, revenue reductions, employee legal action? Lack of value conformity can result in all of these things occurring thanks to a dysfunctional corporate culture.
As a marketing tool, the communication of a business’ values to its clientele and stakeholders can be invaluable. Some clients or customers will chose to deal with a business which has similar values to them or values which they simply feel are honest and ethical.
The making of a business’ values public also makes a business, its owners and its employees accountable to stakeholders outside of the business for the following of these values. Thus ensuring these are not just mythical values created to follow a trend.
A businesses values and resultant culture will evolve over time. It is not an overnight sensation and in some cases for businesses which are using the creation of values as a change process will take a lot of effort and requires changes in the mindset of the organization to begin to work within these values
But as studies have shown that businesses which operate within a set of clearly defined, adaptive and positive values can outperform their competitors by sometimes 200% the short term and long term benefits both financial and non-financial are there to be had.

Risky Business…..

“Article as appeared in the September edition of Western Sydney Business Access…..”

SMEs are exposed to risks all the time. Some are risks that are imposed upon them whilst some are risks that they choose take. Such risks can directly affect their day-to-day operations, or their impact may be serious enough for the business to fail.
Do a Google search of the term “risk management for business” and the number and variety of returned results is mind boggling. It is information overload. Maybe this is why it is often overlooked.
Most business owners know that they can take out insurance policies to cover many of their business’ risks. However, there are many other risks that are either ignored or missed due to incomplete and ineffective risk management processes.
Risk management starts by identifying possible threats and events and then implements processes to minimise or negate them.
Effective risk management should reduce the chance that a particular event will take place and, if it does take place, sound risk management should reduce its impact.
As a side note, risk management is also used to assess and exploit opportunities that may present themselves to SMEs, but this is not the focus of this article.
Below are typical risk areas for SMEs. This is not an exhaustive list of all risks a business may face, rather it helps to explain the risk management process with some common examples.
 – Customers. Does the majority of your business’ income come from a single major customer or a group of major customers? If so, a loss of one or more of these customers could result in a large drop in profit and cashflow in the short term.
Here, businesses should look to either lock in major customers to long term contracts, or try to spread the risk by finding new customers or develop existing smaller customers.
 – Suppliers. Is your business dependent on one major supplier or a small number of suppliers? What would happen if one of these suppliers was unable to supply a crucial product or service to you which in turn forms part of your own product or service mix?
Much like customer risk, businesses should look to lock in suppliers to long term contracts, but also businesses should find alternative suppliers that could be used if needed.
 Staff.  Not only can disruption from staff turnover affect profit and cashflow, for some risks there can be legal or regulatory consequences which can impact on your business.
Does your business rely upon key staff in key areas? If so ensure there is a backup person able to perform the each role. Is your industry plagued by high staff turnover? Make sure that you have quality recruitment procedures.
Do any of your staff hold key relationships with large customers? Ensure staff sign confidentiality agreements as well as reasonable restraint of trade agreements.
Do your staff face OH&S issues as part of their daily work routine? Make sure appropriate OH&S policies are implemented and followed.
 – Information Technology. Have you undertaken an assessment of what would happen if your IT system went down or if your data was lost? Also what threats does the internet, if used, pose security wise to your business?
Businesses must have a back up of their data but also a ‘back up’ plan for when the IT system goes down to ensure trading can continue. Internet security measures must be in place, like firewalls and Private Networks as well as physical security for its servers and hardware.
 – Internal Controls. For many businesses a lack of controls internally can expose businesses and their owners to theft and fraud from within. This risk is one of the most common as well as one of the most damaging.
Controls to protect against employee theft is often as simple as ensuring there is appropriate separation of duties. Unfortunately, employee fraud conducted by two or more individuals is harder to stop, but with effective controls the risk of this occurring can be reduced.
Other obvious risk areas that need attention and prevention/mitigation policies prepared for are; Financial risk, Competitor risk, Economy risk, Location risk, Succession risk, Reputation risk just to name a few.
Risk management is often undertaken on an ad-hoc and reactive basis, but as always, prevention is better than cure. Because business planning centres around the risks faced by businesses it makes sense that risk management forms an integral part of a business’ strategic plan.

Why cash flow controls are so important in busines…….

Picture a scenario where all of your customers decided to delay payment of your invoices by 30 days. How long could your business survive without this cash inflow? How would you pay your staff, meet your overheads and pay your creditors?
If you don’t know the answer to these questions then careful cash flow management is essential to not only your business’ success but to its very existence.
Cash flow management involves carefully planning your business’ cash flow needs via the formulation of cash flow budgets and developing policies and controls around its cash inflows and cash outflows. Here we focus on how to manage a business’ cash inflows.
According to Dun & Bradstreet cash flow troubles account for approximately 80% – 90% of business failures, and more specifically latest research links a 25% increase in business failures with a similar increase in the number of days a business’ customers took to pay their invoices.
On average invoice payment time is 53 days and for many businesses this is almost twice as long as the standard 30 day payment terms that they want to be paid within. And with trading conditions becoming tougher for most SMEs this average is expected to continue to increase.
So how do you keep the cash flowing into your business bank account in this current trading climate? The key is to have both preventative measures in place to ensure customer pay you within your payment terms to begin with as well as effective and efficient measures to reel in those customers who do stretch the friendship.
Below are the solutions we provide to our clients to assist them with developing their invoice collection policies.
Preventative Measures:-
·         Credit & reference check all new customers. This is a simple and cheap process to undertake because you don’t want to provide credit to a new customer who already has a history of slow or non payment
·         Set specific credit limits for all customers. As an internal control this ensures you do not extend credit beyond what a customer has been ascertained as being able to pay
·         Outline and agree upon payment terms up front and on a regular basis. Communication of these terms is the key to ensure customers can’t use the excuse, ‘sorry, I didn’t know they were your payment terms’
·         Make sure these payment terms are clearly displayed on your invoices. This is another way to remind your customers of the agreed upon payment terms.
·         Credit check existing customers. Much like the checking of new customers, this control ensures existing customers have not fallen into trading difficulties with other suppliers
·         Offer as many payment types as practical to your customers. Cash, Cheque, Credit Card, PayPal, EFT or even Direct Debit……make it as easy as possible for customers to pay you so that they have less reason for delaying payment
·         Send out the invoice as soon as possible. As soon as the service is provided or the goods are delivered ensure the invoice is issued. If you don’t issue the invoices promptly you can’t expect to be paid on time.
·         Consider offering discounts for early payment. Business owners love discounts so if planned carefully, this can encourage faster payment of your invoices
·         Depending on your business, ask for a deposit up front before proceeding and considering progress invoicing for longer type jobs or projects. This can assist your customers with their cash flow needs and reduces the chance of a large invoice remaining unpaid for a significant period of time.
·         Ensure you have received written confirmation (i.e. a purchase order) for every order, especially if a customer requires their own purchase order number to be displayed on your invoice. This can reduce the risk of a customer delaying payment because of their own internal authorisation issues.
·         Develop a strong working relationship with your customers and encourage them to contact you if they need extra time to pay before the due date. This is just good business sense and ensures you aren’t just an anonymous creditor.
·         Ensure you have a complete and concise accounts receivable invoicing and tracking system in place and review your aged debtors regularly. If you can’t track when an invoice was issued and how long it is overdue, how can you expect to identify those invoices that need chasing up
·         Consider the use of debtor factoring or debtor finance. In come instances, the use of debtor finance can free up much needed working capital to allow your business to operate and grow, however the downside with any finance is that it comes at a cost.
Collection Measures:-
·         Follow up initial overdue payments promptly. As soon as an account is overdue, follow it up with either an email or phone call reminding your customer that they have exceeding their payment terms.
·         Continue with regular follow ups for longer overdue accounts. For longer overdue accounts, keep up the pressure with regular phone calls as well as emailing monthly or fortnightly statements
·         Make the customer commit to a payment date. Whenever direct contact is made with the customer, get them to commit to a payment date rather than a ‘sorry, cheque is in the mail’ response.
·         Offer repayment schedules. When you know that a customer is having trading difficulties, offer to assist them by agreeing to a repayment plan to clear the debt. Whether you charge interest on the overdue amount is at your discretion and may be dependent on your initial agreement.
·         Document all attempts to recover the debt. For legal reasons, make sure all the details of attempts to chase long overdue accounts are recorded as you may need these if the matter proceeds to mediation or court.
·         Use the services of a debt collection agency. If the customer is no longer going to be using your business and they refuse to pay your invoice consider passing on the debt to a reputable debt collection service.
·         Use the services of a solicitor. Much like a debt collection agency, the use of a solicitor is a last resort and should be used for larger debts owed by customers. The main reason for this is due to the costs involved in going down this path.
In summary when it comes to managing your customers and their payment of your invoices, prevention is always better than cure. So, the key is to do as much as you can initially to avoid having to waste time and money on chasing up bad debts.

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