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Is your cash flowing or going?

Understanding your cashflow is a vital ingredient for any successful family business.

With the right tools – you can demonstrate your business’s capability to your bank and other stakeholders as well.

Scott Hutton – Associate Director, Bentleys Brisbane

Cashflow – the facts

Put simply, cashflow is the movement of money into and out of a business including all revenue, expenses and tax. It also includes changes in working capital, debt and equity repayments, and capital expenditure.

The underlying principle of cashflow management is to make sure that a business has the resources it needs to sustain production/service and turnover. While this is a relatively straightforward management practice – the recent economic environment has provided a timely reminder of the integral role that good cashflow plays in a business.

Long term drought, floods and weather events and economic slowdown across many sectors globally has meant that rural businesses and other organisations have been dealt some severe blows in recent years. Some businesses have found that balancing the debits and the credits is an increasing challenge and cashflow is an area causing concern.

In addition to the pressure mounting as a result of a tougher operating environment, the banks have also increased their focus on cashflow management and are looking for greater assurance from borrowers. Tighter lending criteria has seen a move away from an asset backing approach for rural debt to an expected cashflow achieved approach. The banks now look for more evidence of sustainability to service debt – and rely on cashflow management as an indicator.

Debt servicing and repayments make up a significant component of cashflow for the majority of rural land owners, however it is only one of a range of factors that impact on the cashflow of a business. Growing core operations, maintaining good land management practices, providing employment, supporting and providing incentives for younger generations and maintaining a comfortable lifestyle are also important areas of focus.

The banks are looking for assurance that all of these elements are taken into consideration in your cashflow. The next question is – how do you demonstrate your cashflow capability to your bank?

Forecasting – the future is in your reach

Demonstrating control over the key financial aspects of your business operations and providing your bank with the information they are seeking is easier when you have the right tools.

A “Three Way Forecast” is one of the key tools that will allow financial institutions to get a good indication of the viability of your business. They can also use this information to assist with bridging short term funding gaps or providing more suitable products to the business if situations have changed.

The preparation of a “Three Way Forecast” will allow you to plan and control your expenditure matching this with your expected income. It will also allow you to react quickly to future opportunities or disruptions - thereby saving time and money and ensuring that resources are allocated in the most efficient way.

The three way model is not a new concept - many versions have already been created over the years albeit on back of envelopes, paper or in spreadsheets. There are new integrated software solutions which can be used now however which not only improve accuracy but also are flexible enough to be tailored to your business.

The three key components of three way forecasting:

Profit and Loss - Profit and loss displays the expected income and expenses (profit) for a given period (usually monthly or quarterly intervals on an annual basis).
Whilst the previous years financial statements can be used as a starting point, more focus then needs to be put on what actually drives the profit and loss.
Income drivers could include numbers of breeding stock, expected turn off rates (number and weight), expected prices achieved, mortality and weight gain achieved throughout the period. Expense drivers could include number of employees, level of debt or required stock purchases to maintain livestock breeding herds.
Balance Sheet - A Balance Sheet provides a snapshot of the expected levels of debtors, creditors and stock in a business usually expressed on an annual basis with monthly or quarterly intervals. In most cases the balance sheet will be driven by the profit and loss and the cashflow. It is still important that this component is prepared as it will highlight the viability of a business. Is equity being created or destroyed?
Cashflow - Cashflow is not profit! It is when the expected inflows and outflows actually hit the bank account. Cashflow also includes capital expenditure and principal loan repayments which are not in the profit and loss.
Preparation of the cashflow component of a three way forecast is extremely important. It quantifies the short term survival of your business. It highlights based on your assumptions the months where there are cash shortages or peak borrowings.

How will it work for my business?

Developing a strong and robust forecast will illustrate your financial position and future pathway.
Regular review of your forecast, comparing actual results and adjustments made (rolling forecasts) to future periods, will allow for future changes and will identify the adjustments needed to balance effects of past results.

Through applying this key tool, you can also use the information provided to measure, manage and monitor your business and find answers to some key questions – including:

• Is your gross profit margin consistent or below industry standard?


• What is your breakeven point?


• What are your debtor days?


• What are your accounts payable days?


• Do you have a healthy interest cover ratio?


• How will changes to key drivers in your business affect its financial performance?

Armed with this knowledge, you can confidently demonstrate your capability to banks and other
stakeholders and ensure that your operations are sustainable and viable.

Bentleys Queensland services key farming and regional businesses across the state, especially those in Central and Western Queensland.
Our team has specific experience in the broad range of agricultural and horticultural sectors and is a proud supporter of numerous regional community initiatives including the Young Dairy Network, Roma Picnic Races, Rockhampton Amateur Race Day and Isolated Children’s Parents Association of Queensland Conference.

	Scott Hutton Business Advisory Services T:07 3222 9777

Think Ahead. Talk to Bentleys Today.

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