Audio | Transcript

• Cashflow

• Profit and Loss

• Paying Debtors

• Credit terms

Sally

Barker

Good Morning welcome to local business focus I’m Sally Barker. Joining us this morning Sonia Pilkington from Asset Financial Accounting proud station and sponsor.

Good morning Sonja.

Sonja Pilkington

Good morning Sally. Thank you for having me.

Sally

Thank you for joining us. Now this is a very interesting topic we talked about today its cash flow and focusing on cash flow in your business.

To start off with, can you explain to us what is cash flow?

Sonja Pilkington

Cash flow is not profit.

Many of our business owners look at it and say I have made this much profit.

Why isn’t that money in my bank?

It doesn’t equate to money in my bank. Why is it not the same?

That difference is cash flow.

Sally

So, when we are thinking about this can we get ourselves into a bit of trouble, looking at it as profit rather than cash flow?

Sonja Pilkington

Definitely, because interest and profit is debt that you haven’t received yet, so people still owe you money.

You still owe other people money for stuff that you bought. 

So you haven’t paid the suppliers yet and that is the difference.

Looking at the profit and loss statement, saying what the profit is and then looking at your bank statement and going, well the balance is not the same and not understanding why, or where the money is coming from, or when, and how the money can be paid. So you think you have a lot of money.

Or you’re not going to go I don’t have any money and understanding why.

That comes down to maybe your credit terms.

You might say to somebody pay me in three days from end of the month. And you think I will have money in thirty three days.

You won’t have money in thirty three days. You’ll have money maybe in 60 days, and people get that so wrong so many times. Because you could potentially have done work on the first of the month, waited a whole month for it to go in and then they take a whole other month before they pay you.

60 days, with no money. And you might have to pay your supplies at seven days. That means your money’s gone out and you put nothing come in.

Or you’ve landed this big job with one of the massive companies in the city and they might just change your terms for you, and they don’t tell you.

So your terms might be seven days, and they’ve just given us an offer on terms on 90 days.

So you’re lucky if you get money and maybe 120 days.

And that effectively means that you’ve become your customers bank.

And I don’t think you actually had any intention of ever becoming a bank for somebody else. That’s where you can come unstuck.

Sally

So even if you do have you say seven day terms. They might not be adhered to.

Sonja Pilkington

No, but in those cases, there’s a couple of things you can do.

You can make sure that when you engage your customer from day one. Tell them to adhere to strictly seven days. If they don’t pay after seven days, send them a gentle reminder saying by the way your account is overdue. If that doesn’t work, I phone them.

If they continue to not adhere to your terms and they’ll continue to rack up a debt. Consider stopping servicing them. Why do you want to have all the pain and the potential of losing more money. There are things you can do.

Sally

So people, many people have been caught out in the past, is it wise to have a certain percentage as a deposit before work starts?

Sonja Pilkington

It depends on the service that you’re providing. That can actually help.

I have a friend that is a graphic designer who said I’m so poor, because people are not paying me and you go why are they not paying you.

Well, we have to start the job. We then have to agree on something, it then goes backwards and forwards five times, and eventually it goes to print and then maybe I’ll get the money back.

Well maybe you should  consider doing some progress payments, and pay off these bills.

Tell the client when it reaches this stage you have to pay 25%, when it reaches this stage you have to pay 50% and so it goes on.

It helps your cash flow and it helps the clients cash flow. They are knowing what they are upfront for.

It’s the same as going to restaurant you don’t go in there saying I will pay you next week. You go in there and you pay now. They’re not going to be happy if you go I’ll pay you next week.

Sally

Yeah, of course. So what tips would you have for people if they are focusing on cash flow, and not understanding the difference between… well that’s not what’s in the pocket.

Sonja Pilkington

They need to understand what the timing of the money is, because it’s not just paying the suppliers.

It’s also understanding or knowing that you might have other debt repayments.

So you might have to pay a loan, or car loan. You have to pay GST, and there’s just knowing when you have to pay those things so you can make provisions for it.

So say for instance if you have a GST debt, or you just registered for GST, and you have to run on a cash basis.

Every time somebody pays you, put a chunk of that money aside into another savings account. When the time comes to pay your GST, you have the money available, you don’t have to go oh dear, where’s the money going to come from.

Same when you pay your employees, you only pay the net amount of employees, but there’s a portion of tax.

Take the tax money that you’ve already deducted from your employee, put that in a separate separate savings account. At the end of the month when you lodge your income activity statement, you have the money available,

No panic, No stress.

Sally

Now if you don’t want to do this for yourself, you would have someone to help you in this area in your accounting area.

Sonja Pilkington

Yes you can. You can you can ask your bookkeeper or accountant to actually help you and make a plan and set up those arrangements for you.

Sally

So a good bookkeeper or accountant would be able to explain this to you?

Sonja Pilkington

They should be able to, but sometimes business owners don’t like to listen to them, and they need understand the value of their bookkeeper or accountant and say, if they tell you, listen.

Listen to what they’re saying, they know what they’re doing. They have seen it.

They are also the first ones that will see how you are bleeding money. If you’re spending money, more than what you should be and especially if money is not coming in.

Sally

Right, so, so you’re saying, you know, business owners don’t want to hear about how they going financially.

Sonja Pilkington

Not that they don’t want to hear, sometimes they choose not to listen.

So they are hearing it but they’r not listening, and they’re not taking the action, because ultimately it is still the business owners responsibility to take the action.

They might be going out and saying Oh, we have lots of sales but the money’s not coming in. But they still go on business development trips. Engaging new stuff. But unless they actually look at the bank balance and realise there’s no money there and they’re not doing anything about it. The business will not survive.

Sally

Then that’s just going to cost them money really isn’t it?

Sonja Pilkington

…and potentially other people will lose out.

Their suppliers might not be paid, their staff might loose out on superannuation, the staff might not get their leave payments. 

Sally

So, before going into business make sure you are well educated on the difference between cash flow and profit.

Sonja Pilkington

…and just get help.

Just ask people, say I don’t know how to do this. Can you help me.

There are software solutions available. There are some excellent spread sheets available.

Or just look at your bank balance, make sure you do the bank reconciliation daily so you know what’s coming in, what’s going out.

Sally

Don’t stick your head in the sand.

Sonja Pilkington

Definitely don’t stick your head in the sand, it doesn’t help.

Sally

Okay, just don’t be frightened to ask questions is that what you’re saying.

Sonja Pilkington

Always ask questions, make sure you ask questions and take the action that you need to.

Sally

So you’re asking a question about this sort of area of your business. What if you’re getting some conflicting information?

Sonja Pilkington

That’s a tough one. I was gonna say go with your gut, but what if your guts not right.

If you’re getting conflicting information, maybe ask more questions. Make sure that they explain to you until you understand. If they can’t there is a problem.

Sally

Okay, so there’s no point in just saying I don’t understand this, someone else is handling it for me.

Sonja Pilkington

No, it’s your responsibility.

You set the business up, you can’t just walk way and have your head in the sand and say it’s not my problem.

That is the attitude of an employee. it’s not my problem it’s the boss’s problem.

You are the boss, it’s your problem, you have to sort out, you have to fix it.

Sally

Wonderful, thank you so much for your time today. Thanks for joining us on local business focus, Sonja Pilkington from Asset Financial Accounting proud station sponsor.