Tag Archives: cashflow

Profit Or Cashflow

The word in business is profit. The word is simple to understand. Companies are considered a success, if they generate profits. For small business, however, profits do not necessarily equate to healthy cash flow or even success.

The accounting definition of profit is sales(including credit sales), less expenses. The oversight of the important aspects of “profitability”, leads to numerous problems for business owners.The problem with accounting is that assets purchased cash, will reside on the balance sheet, and inflate the profits, artificially,by the very same amount, that the asset was purchased for.

Invoiced credit sales are recorded in sales journals, and a corresponding debit(debtor), is raised for those credit sales. Value Added Tax or general sales tax is charged on that invoice as it is processed.

One major shortcoming in small business, is the lack of credit control. Many business owners lack the skills to collect outstanding debts. Where VAT or GST has been charged, it become payable, regardless of whether the debtors invoice was paid or not. Businesses also pay tax on profits.

Business owners(on the advice of their accountants) are profit driven, and not cashflow driven. This leads to certain interpretations of their finances. If assets exceed liabilities(solvency),current assets, exceed current liabilities(liquidity), they happy. Business owners consider the available amount on their overdraft or business credit card facility as CASH AVAILABLE! Its not available cash, but debt!

Solvency or liquidity should be measured by the amount available cash(bank and cash on hand), exceeding liabilities. All other assets should be be excluded. The reason is that assets ,could be sold far below their market value, if the business had to be liquidated. Cash is the only asset that can be used, without incurring a cost or loss, on conversion.

What about the cash flow statement? The cash flow statement is not compulsory for small businesses, but is viewed is an important tool, for analyzing the business’s cash flow. Many tax authorities accept only the income and expenses account. But even the cash flow statement has its flaws. Loans advanced will reflect as “cash from financing activities”, thus creating the illusion that the “healthy Bank Balance”, means the business is healthy. In an environment of high interest rates, the loan can be risky, and that aspect has to be factored into the reporting. A note on the financial statements, is not sufficient.

Many accountants might not agree, with the above. But its my firm belief that thorough cash management is lacking in most small businesses. Accounting financial statements should only be used for tax or statutory purposes.

A cash flow driven business would operate as follows:* Collect outstanding debtors as soon as possible(The most difficult and problematic, I agree)

* Take substantial cash deposits from customers, before commencing a project

* Bank cash promptly, since cash gets lost or spent very quickly

* Stall creditors, as long as possible

* Start investing 5 to 10% of cash received in a particular month, in different bank savings accounts

* These banking accounts also known as reserves, can be called:

a) A Building Fund(For future expansion)

b) A Tax fund and lastly an Emergency fund (Any emergencies that may occur).The reserves can also be augmented by additional sales, the value of credit card payments, that have been paid up. (Would not hurt, since you used to those monthly credit card payments)

* Before spending cash on any expense, apart from salaries, funds should be set aside for the “reserve accounts”

* The benefits of the reserve accounts are two fold, 1) It creates a buffer, between income and expenses(will exert pressure on overheads/spend less), and 2) The business will gradually build capital in reserves, that the business would have had to source somewhere else, if the need arose.The reserves would grow rapidly, if it remain untouched, for say ,twelve months. This exercise requires discipline, for it to work.

Focus on the cash balance and savings, will ensure a rapid (almost magical) growth of cash! The business will also become less reliant on loans, credit and capital from outsiders.


Unconventional Budgeting and Cash Flow Forecasting

Budgeting in a small business is a neglected area. It is only when business plans are required that the business owner will prepare a cash flow forecast or budget.

Most businesses divorce the budget from the cash flow forecast. In fact, the cash flow forecast is only furnished when requested by the bank in most cases. Businesses have yet to learn that the cash flow forecast is a valuable tool for analyzing internal finances.


Collapse a budget and cash flow forecast into ONE. And allow the cash flow forecast to serve as your business’s financial map, for he next 12 months. Budgets are vigorously implemented, only when a business starts shedding cash. And major expenses are cut, drastically, when the owners and their accountants draw up budgets.


A budget will target, run away expenses, in an attempt to bring it under control.  The main expenses to normally go would be staff costs (lay offs), insurance, advertising and stationery. Telephones are barred and transports costs are reduced radically. So the budget is expensed focused.


Furthermore, if a budget was drawn up for previous years, it is highly likely that, sales could have been too optimistic, and cognizance was not taken of credit sales and its impact on cash flow. Hence my departure from accepted practice, and proposing combined cash flow and budget.


Overheads/ Cash outflow

I concede, that high overheads, is a killer for many small businesses. But the obsession with overheads is not going to save your business. You in business to grow sales and not to be bogged down by high overheads! If phone calls are barred, or the advertising budget is slashed, more problems would be created, than solved. Evaluate carefully if an expense is linked to business growth, and think twice, before slashing that expense. Say you incur an advertising cost of $ 10 000.00 per annum, and it can be proven that it brings in $ 20 000.00 in revenue. Reducing the budgeted amount by $5000 will affect sales severely. If revenue is down, increase the advertising budget. If you lack skills, budget for more, not less, employees. And increase the telephone budgeted amount, you need that phone, to call more prospects. Of course, weak advertising campaigns, unproductive calls, and lazy staff cannot be entertained. Budget accordingly, but be very analytical in your approach.


Cash Inflow

Very little emphasis is placed on the cash income component, in a forecast. The cash inflow is only relevant in relation to how it affects cash outflow. If the inflow is too low, an adjustment is made to outflow. Rather remain focused on how cash inflow can be boosted as opposed to reducing outflows. Be optimistic about your cash inflows, not your revenues.

Don’t project for expected revenues, project for cash revenues, deposits, advances, sale of assets, based on current trends. A picture will begin to emerge of what your true cash requirements truly are in the business. If the report reveals that limited cash resources would be available, it means that more creative methods should be devised to increase cash flow, not radical reductions in cash outflows!


It might seem foolish to spend more on certain expenses, when cash flow is slow, but panic and fear is your worst enemy in a time of crisis.


If businesses don’t grow, they contract and die. The quickest way to shrink is to radically reduce important overheads.


Most businesses that reduce overheads, drastically, continue to remain stuck in a cash flow crisis! Energy flows where attention goes…


Author: Sean Goss  sgafc@mweb.co.za



Setting Daily Cash Collection Goals or Targets

Open any book on business, or surf the net, and you will find information on goal setting and its importance. I am 100% in agreement with the setting of goals, but sometimes find fault with the distant or long-term goals. We set goals for the end of the year, or the month. Effectively, deferring the goal.


Long-term goals absolve its creator, of any immediate responsibility. So he/she goes into a “dream-like” state, hoping to accomplish the goal at month-end. When the goal is not attained, frustration sets in, leading to no further goal setting, and leaves the business owner in a rudderless state.


Most businesses set sales targets for a year or month. The sales will be recorded in accounting books, and substantial amount of those sales could be credit sales. So hitting the monthly sales target is excellent, but sales driven by targets would invariably be “credit sales”, and our old problem rears its ugly head again, CASH FLOW!


The conventional accounting for sales should be outsourced. The owner should be more hands-on with “CASH ACCOUNTING”, and set cash collection goals.

Try this cash goal setting strategy. Break down that huge goal of R 50 000 sales for the month, into manageable  “bite-sized chunks”, of say R2500 PER DAY! (That is 20 working days; a month has about 22 to 23 working days).  It prompts you into action immediately. From the moment you wake up, you have to work towards hitting your R2500 target at end of day.


And why not shift the focus away from a sales target of R 2500.00 to a Cash Target of R2500! Sometimes your cash and sales target would converge (Cash Sales), but as any good accounting student will tell you, it’s not the same thing.


Your cash target now becomes that debtor’s age analysis, not clients,(unless they cash clients off course) with outstanding payments, to your business. Plan your day, with only cash in mind, and embark on shrewd methods to extract cash from your debtors. Opt for a cash sale, rather than a credit one. Insist on a deposit, for a major job. If you have a credit card utility machine, go ahead and swipe that card!

Your deposits, credit card sales settled by bank that day, cash sales and cash collected, constitute your daily cash takings for the day.


Follow through by creating a spreadsheet with the following columnar sections

  • Checks Collected
  • Cash Collected
  • Credit Card payments settled
  • Direct transfers to the bank

 Another header in bold on your spreadsheet, should be your daily target. Provide columns for dates, and an important comments section. On the” comments section”, notes are made as to whether the target was attained or not. Be disciplined. You either hit a daily cash target or not. No “ifs” “nearly” or “buts” here.


SET YOUR ANNUAL CASH TARGET, and divide your annual target by twelve, and then by 22 to 23 working days, and you arrive at your daily cash target. Working


pro-actively on a daily target and attaining it everyday, equates to a monthly and annual target accomplished.


If you exceed your daily target by an amount equal to your daily target, you cannot relax the following day, and regard the excess amount as the next day’s target. It is another day, with a new target.


Implement this method, and see your cash inflow go through the roof! On a cautionary note, all cash should be banked, and don’t forget to save some of the cash!


Author: Sean Goss  sgafc@mweb.co.za



The Cash Accounting Gap


Cash is King, so they say, but cash is also a double- edged sword. It is the lifeblood of your business, but can also become a curse. Be vigilant, and take extra care when dealing and accounting for your cash.


Dealing with check receipts or credit card transfers is very simple. A wide array of accounting software is available on the market, which offers a seamless integration from your credit card settlements and bank deposits statements into your accounting records.


To date, no such software exists for cash, save for, point of sale terminals records (which overlooks cash outside the system) the business owner’s information on a spreadsheet or manual records. Millions go missing on a daily basis in most small businesses, due to theft, losses and sheer negligence by the owner. Constant “drawings”, from cash on hand, by the owner also contributes to this cash “gap”.


In a nutshell, the cash gap, is that variance between cash received (debtors, cash sales, advances) less cash banked and transferred to the recorded cash float or cash on hand. In most cases, the business owner bears most of the responsibility for this sad state of affairs.

The nifty accounting software, that builds accounting records in seconds, only reveal a part of the story. Cash invariably gets under reported in small business accounting.


Even the most advanced point of sale terminal, will not address a cash management problem, if the business owners hands are continuously in the till. Of course the owner can do as he/she please, but then he/ she should refrain from seeking advice if discipline is lacking.


Surely, the owner is entitled to the cash in the business? Yes, but then I will respectfully suggest, that the owner set a decent salary for himself/ herself. Pay yourself, as if you were an employee of the business. It is dangerous to mix personal expenses, with business expenses.


Bank all cash before the close of business, or the following day. If cash is required in the business, operate on a petty cash system. Advance a cash check to the petty cash on a weekly basis, rather than using the cash on hand for petty cash expenses. The petty cash system creates a proper paper trail for cash accounting.


If certain suppliers insist on cash only, maintain a cash float, with proper accounting for such cash transactions and bank all unused cash. If no alternative exist, but to use cash received, ensure that proper record keeping is in place. Example: Say the business receipted $ 5000.00 for the day, but urgently had to use about $750.00, write on the till slip that $750.00 was utilized.

The relevant entry for the $750.00 debit should be affected against the cash control account. The cash control account is a special account for cash sales. Credit cash sales, and debit cash control. Clear this cash control account, by banking the available cash!

Make a further note that the balancing $ 4250.00 was banked on a certain date. This will enable your accountant to trace precisely where the $ 750.00 went, and compare the deposit on bank statement to the note on the till slip summary.


Business owners are known to complain or gloat about, sacrificing a regular salary. Whilst this comes with the territory, and serious cash flow problems are encountered by small business, including cash pilferage, the owner is not blameless. Maybe all those drawings on a daily basis could have contributed to a fixed salary at month end, for the owner. Theft and cash losses can be addressed early, if the methods highlighted above, are implemented. 

Responsibility and control goes hand in hand.


Author: Sean Goss  sgafc@mweb.co.za

Determining a profit Without an Income Statement

The well-known and elementary method of determining a profit (or loss) is a simple method of deducting expenses from income. This is how accounting students are taught in Accounting 101, or at school.


To tamper with taxable income, adjusting sales reduces businesses profits. Or alternatively to impress stockholders, profits are artificially boosted by either tampering with expenses or accruing for sales, not realized. (Remember the accounting scandals and corporate failures a few years ago?)


Drawing up an Income Statement is considered easy, since the income less expenses exercise can be performed by anyone. The oversight of many aspects of accounting, such as double entry, accruals and book entries such as depreciation, has created many problems for novices, with Tax Authorities.


The simplistic Profit and Loss statements drawn up mostly by sole owners are grossly out of balance, since the asset component of accounts could be overlooked, or the expenses on a roughly drafted Income Statement could include assets purchased.

Reports would thus not be an accurate reflection of the true state of the business.


The services of an expert accountant should always be budgeted for. If business owners lack the skills, don’t avoid procuring the services of an accountant. In the same way as an attorney is indispensable, so an accountant is necessary to draw up a proper set of accounts!


Whatever means you use as a business owner to record business transactions, Tax Authorities don’t need your Income Statement, to determine true profits. Even without a physical audit, they will determine your true profits, using advanced information technology, as well as advanced accounting methods.


Tax auditors will build an asset base from all data that they can reasonably access, such as properties, vehicles, stocks and bonds, bank accounts and information from your suppliers and customers tax information.


As soon as a picture has been constructed of your assets and liabilities, liabilities are then deducted from assets, and an EQUITY BALANCE, is determined! Using the equity total, less Capital advanced, and previous years profits, an almost accurate figure of profits is arrived at! If this profit is way above the declared profit (Income Statement), the business will be in serious trouble, with the tax authorities.


This method is the simple, but overlooked accounting equation. (Assets-Liabilities=Equity). By just analyzing your balance sheet in this fashion, anyone can double-check the profits in relation to the income statement profits.


New International Accounting Reporting Standards have implemented “Balance Sheet Auditing”. These standards prescribe that the Balance Sheet Items should be reviewed first, when drawing up financial statements.


For the business owner it is important to bear in mind that the Balance Sheet method can be used for his internal accounts evaluation as well. More so, in an incomplete accounting environment.


In conjunction with an accountant, a balance sheet “profit” can be determined and reconciled back to an income statement profit. The trial balance is not always sufficient for proper balancing and profit determination. Assets beyond trial balances may exist that are not properly accounted for.