Cashflow management is going to be extremely important to all small/medium enterprises during 2012. The continuing problems in Europe, which resulted in the tightening up of lending practises by Australian banks and the actions of the Australian Taxation Office in trying to recover a large amount of tax, primarily GST owing on Business Activity Statements, highlights the necessity for small business to be very diligent in the management of cashflow.
Debtors:
The management of debtors commences well before the first credit sale is made. Businesses should implement
an effective debtors’ system which includes a written system covering matters such as:-
- credit application form to be completed by the prospective customer before any sales are made;
- internal procedure for checking the credit application, contacting the referees and then making a decision as to whether a debtor’s account is to be opened;
- credit limit and the terms of the payment;
- a “welcome to a new customer” letter confirming the decision to approve a debtor’s account, advising of the credit limit, terms of payment and any other requirements;
- notification to the sales team and office staff of the new customer details including any additional information that the client requires to be submitted with the tax invoice;
- periodic checking with the client to make sure all information has been supplied as required, so as to speed up the payment process;
- a system to require Directors of private companies to submit Directors’ Guarantees;
- an internal procedure to ensure that Directors’ Guarantees are appropriately filed;
- an internal procedure on the registration requirements under the Personal Property Registration Act;
- preparation of debtors’ aged analysis promptly at the end of the month;
- follow up of outstanding debtors;
- calculation of debtors’ days outstanding;
- preparation of a list of debtors to be followed up.
Stock:
Does your business have to supply stock?
Has an appropriate system been introduced to safeguard all aspect of stock from:
- the time the order has been placed?
- checking the goods when they arrive?
- checking the tax invoice?
Is the storage of stock adequate to safeguard it from theft, pilferage and deterioration? Is stock being regularly “turned” so that the older stock is sold first?
Is the stock “turn” being calculated, on a regular basis, both on an overall basis and for an individual or section of
stock?
Work in Progress:
Is there a monthly review to ensure that progress claims are being raised promptly?
Is there a review at the end of each month, to ensure that, if a job is completed, it is finalised and invoiced so it can be removed from the work in progress system to ensure that any profit/loss on that job is calculated and reviewed by management?
Creditors:
- Does the business calculate creditors’ days outstanding?
- Is a check made to ensure that the business is trading with creditors as negotiated?
- Are payments being made too early? For example, if management has negotiated payment terms of 40 days with major suppliers, are payments being made at an earlier date, say 15 days, because the bookkeeper wants to pay bills earlier? This defeats the purpose of negotiating a delayed payment arrangement.
- Is the business trading well beyond the negotiated terms with creditors?
- What would happen if major supplier creditors demanded that their accounts were brought back into the stipulated trading terms within the next month? Would the business be able to find the money to reduce the amount owed to the supplier?
Bank Account:
- Is the business operating within the negotiated bank overdraft limits?
- Is the business paying loan repayments as negotiated with the bank?
- Is the business abiding by any covenants included in the bank loan agreement?
- Is the business able to pay all debts owing to the Australian Taxation Office as they fall due?
This is a summary of some of matters that can affect cashflow management. If you would like to have a discussion with us relevant to a review of the cashflow management systems in your business, please contact us.
