It pays to heed early cashflow warnings

By JEFF MELTZER

Business owners will be the first to know if they have enough money in the bank to pay this week's wages or creditors, PAYE or GST. They will know before anyone else if there is a cash flow problem.

A company's inability to pay its debts on the due date will not necessarily mean that it will fail or go into liquidation, but it is a sign to the owner that something is wrong.

Far too many owners fail to recognise this.

Instead, they focus on juggling the company's cash to pay certain creditors ahead of others. Invariably, one that misses out is Inland Revenue, for PAYE and GST.

In too many cases, PAYE and GST are used by business owners to fund their business. Each week, as employees are paid their net wages, the PAYE deducted should be put into a separate bank account.

A similar situation exists with GST. It should not be part of a company's cash flow forecasts or be relied upon to fund the business.

Instead, as with PAYE, the net GST should be paid into a separate bank account so it can be paid on the due date.

Some basic steps to minimise the risks of business failure:

* Keep books and records up-to-date so that you know the level of debtors and creditors and cash flow of the business.

* Regularly review future cash flow requirements to ensure payments can be made on time.

* Never stay at the peak of the overdraft limit for long periods. Try to match cash received with payments.

* Ensure investments, capital expenditure and GST payments are provided in cash flows.

* Follow up all debtors to ensure payment will be received on due date. Ensure that credit terms are adhered to.

* Prepare and mail invoices each day.

* Resolve debtors' queries immediately and ensure credit notes are processed promptly.

* Keep in regular contact with your bank and suppliers: they will be more tolerant if glitches arise.

* Maintain regular contact with your accountant. Consider preparing monthly financial statements.

* Don't use your suppliers as your banker.

* Don't use the IRD as your banker.

* Don't embark on an expansion programme before it has been properly evaluated and proved viable. Have your adviser review the underlying assumptions and projections.

* Don't allow stock to increase over usual or budgeted levels. * Ensure that obsolete stock is regularly identified and recorded.

* Don't draw out funds for private use over and above a basic salary in the early stages of the life cycle of your business. There will be time for that later.

* Don't allow lack of cash flow or poor profitability to cause you not to obtain professional advice when it is needed.

* Jeff Meltzer is a partner at insolvency specialist Meltzer Mason Heath. He features, with business partner Karen Mason, in The Receivers, a TV One documentary about their work, which will be screened on Monday at 8.30pm.