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Hopefully by now most Small to Medium Enterprises (SME's) will have completed their 2007 budgets and (also hopefully) a general business plan for the next 12 months.
What concerns me however is that many businesses do not then see what impact these financial and operational plans are going to have on their cash flows. The old saying still rings true - "many a profitable business has gone bankrupt" Why? Well in most cases its simply through a lack of cash.
There is a hidden danger in expanding rapidly. Achieving record sales, securing new stock lines, winning new clients etc may all be to no avail unless the cash impact is accurately measured. It is absolutely vital to see how much cash is available to meet the cost of the expansion, as well as meeting your current obligations.
This is particularly relevant in the March/April/May period, where provisional tax, terminal tax, GST, FBT, 5 week wage cycle etc. and annual salary bonuses can place severe strain on cashflows. There are a number of SME's who are performing really well in terms of sales and profit but at the end of the year have no cash to meet these commitments.
This cash drain is an annual event and should usually be funded by retained profit and, more importantly, debtor collections. If you have not planned your cashflow well during the year in relation to debtors, stock and the timing of creditor payments you may need to seek urgent help.
During my time in banking I saw all too often SME’s coming to the bank for emergency funding to cover what should have been known commitments. This inevitably placed stress on the SME owner and distracted them from focussing on their core activity of running the business.
A professional advisor should be able to analyse the information in deeper detail and produce linked forecasts, commonly Profit & Loss, Cashflow, Balance Sheet, Funds Flow and Key Ratios.
This also enables the factoring in of other items such as tax & GST provision, interest, depreciation etc to give the fullest possible picture of the forthcoming year’s activities. If additional funding is required the banks are much more likely to be forthcoming on the basis of a thoroughly researched fiscal plan than turning up after the event with ‘your cap in your hand’ so to speak.
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