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Keeping the cash flowing

CASH flow is the lifeblood of any successful business, so managing it and the credit book of the business is crucial.

Without a properly managed cash flow a business soon encounters difficulties with payments to employees, suppliers and the Australian Tax Office.

A healthy cash flow can decrease required capital and increase profitability by reducing interest expenses.

CPA Australia WA director Justin Walawski said understanding the cyclical nature of cash flow could help improve management.

He said businesses could improve their cash flow management by sending out bills promptly, reducing the collection period and banking daily.

“Businesses should also screen potential creditors, set realistic credit limits and follow up outstanding accounts quickly to reduce delays in receiving payment,” Mr Walawski said.

“Where available, use trade credit. It is a short-term, interest-free loan.

“If possible use discounts for prompt payment where the discount exceeds the interest you might earn with the cash banked. Or use credit cards for business purchases.”

“MG Kailis chief financial officer Ken Glasson said it was important businesses were aware of their cash-critical times and made suitable allowances.

The seafood conglomerate enjoys an annual turnover of around $180 million.

Mr Glasson, also an Institute of Chartered Accountants in Australia finance spokesman said MG Kailis’s business was very cyclical so the company had to be aware of its lean times and good times.

“Our facilities are structured to cover those plus we have some ‘freeboard’ built in to allow for any unorganised spending because we know our business can benefit from buying counter-cyclically,” he said.

“We plan long term. With cash that’s 18 months to three years out. We forecast what our cash flow position is likely to be during that time and compare it with the actual results.”

Mr Glasson said that comparison was a done on a daily, weekly, quarterly and annual basis.

“We monitor our cash burn and if it is getting out of line we find out why and fix it,” he said.

Cedar Woods chief financial officer and ICAA finance spokesman Paul Freedman said his company relied on its budgeting techniques to catch any cash flow problems early.

“We put together a cashflow budget on an annual basis. At the same time we look another 12 months ahead to see what cash flow pressures could be coming,” Mr Freedman said.

“We review the cash flow position monthly. With that monitoring and the 12 months forward estimates we can indentify problems early and come up with ways to fix them before they become an issue.”

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