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    Cashflow

    its effects on business & the economy

    Cashflow and businesses

    There comes a moment in everybody’s business when they discover that the profit they make in the business does not equal their cash flow. The value of a business is dependent on cash flow, not profits. A business whose fixed assets base is high and/or requires high working capital is likely to require more of the profits to be reinvested back in the business, thus reducing the cash available for debt service.
    The more assets you have, the more income you need to make. Unfortunately, a lot of people think any asset is a good asset and so build them while forgetting the rule about profit and cash flow.
    The more assets you have, the more income you need to make. Unfortunately, a lot of people think any asset is a good asset and so build them while forgetting the rule about profit and cash flow.

    Cash flow is considered as a very important aspect of a company. The amount of money received from sales, as well as the money spent to keep the company in full operation, will directly affect the cash flow amounts on a business.

    Positive cash flow affects on a business can also create the needed economical boost in social standards because many consumers are hesitant to purchase items from companies that do not have a good reputation or are not as well known as the competitors. For this reason a business using additional funds that are available for advertising purposes can increase the amount of customers that will use their services, thus increasing cash flow.

    A study of successful businesses conducted by Geneva Business Bank found that the greatest potential threat to cash flow occurs when a company is experiencing rapid growth. If sales are up, the owner must also hire more employees, expand plant capacity, develop new products, increase sales force and customer service staff, build inventory and incur other drains on the firms cash supply. However, collections from the increased sales often lag behind as the company grows and the result is a cash crisis. Unfortunately, many small businesses do not engage in cash planning.

    Many small business owners do not engage in cash planning and out of 2,200 small businesses studied, 68% performed no cash flow analysis at all. The result is that many successful, growing and profitable businesses fail because they become insolvent as they do not have adequate cash to meet the needs of their growing business with a booming sales volume.

    Small business owners do not understand that if they are successful, stock and receivables will increase faster than profits can fund them. The resulting cash flow crises may force an entrepreneur to lose equity control of the business or ultimately declare bankruptcy and close.

    Failure to properly plan cash flow is one of the leading causes for small business failures in the United States. Many small business owners lack a general understanding of accounting principles.

    When a business sources funding externally from lending institutions extra costs such as increased interest and bank charges are involved; those costs affect profit and cash flow as they can accumulate very quickly if the business goes outside their credit terms.

    Businesses only planning once a year have a 36% survival rate over five-years. This contrasts with those planning monthly which have an 80% survival rate.

    70% of businesses which go bankrupt are profitable when they close their doors. A common misconception about cash flow problems is growth will fix it, but this often leads to more cash pressures, especially if companies discounted to boost turnover.

    The number of small businesses going bankrupt jumped almost 50 percent over the last 12 months with poor cash flow management is being blamed for the alarming figures.

    Dun & Bradstreet’s Business Failures and Start-ups Analysis report for December 2011 indicates the number of bankruptcies jumped 48 percent over the last 12 months and the number of small business start-ups fell by 95 percent.

    With its steady bankruptcy rise, Australia is now classified in the same risk category as a number of countries impacted by the Euro-zone debt crisis, including Italy, Portugal, Spain and the United Kingdom.

    Australian Securities & Investments Commission statistics show that in 2004 and 2005 there was an average of 18,000 businesses that entered into external administration or insolvency.

    The Australian Small Business Development Corporation statistics show that 60% of small businesses fail in the first three years of operation.

    Today's economic conditions make cash flow planning even more critical to the survival, growth and profitability of a business. It is fundamental that appropriate forward cash flow planning be undertaken to assist in survival because with little or no planning businesses could be forced to borrow additional funds or even have to sell up to cover debts.

    Australian local business failures have trended steadily upwards since 2008, growing more than 30 percent.

    In Australia, rising insolvencies are largely being driven by poor sentiment outside the mining sector and a tightening of credit which will create a knock-on effect on businesses as cash flow becomes more strained.

    Local Australian small business insolvencies hit a record high in February, with the number of companies entering external administration reaching their highest level since 1999.

    According to figures released by the Australian Securities and Investments Commission (ASIC), 1,123 businesses went into administration in February 2012, up from 518 in January2012. This was the highest monthly figure recorded since ASIC began releasing statistics in 1999.

    The ASIC figures showed a jump in the number of businesses being wound up via the courts – a total of 449 in February 2012 compared with 79 the month prior, representing 40 percent of the total businesses placed in administration.

    In March 2009, 1095 Australian businesses were placed in administration.

    The economy and changing market conditions will have an impact on all businesses, but good cash flow management is the key to running a successful business.

    Free cash flow is an important measure of a company’s growth potential and managers who know how to reinvest in the business are key players in turning excess cash into earnings growth.

    February 2009 Insolvency Statistics from ASIC was a reminder of the consequences of poor cash flow management.  In NSW, 348 companies went into external administration, up from a massive 216 in January of the same year.

    In the 2nd quarter of 2011, figures released by Dun & Bradstreet showed 3,000 businesses collapsed, leading experts to urge SMEs to focus on fixing cash flow or risk becoming part of these statistics.

    Professional services businesses, like an accountancy or law firms, are affected by slow paying clients who are also feeling the economic strain and if this goes on for too long, it can spell doom for those businesses as they get behind in payments worth hundreds of thousands of dollars.

    A study reported from Equifax, the credit reporting agency, found that bankruptcies among the US nation's 27 million small businesses leaped by 81 percent between June 2008 and June 2009.

    The U.S. Small Business Administration (SBA) estimates that about 600,000 new small businesses are launched each year, a 2007 study reported in the U.S. Bureau of Labor Statistics' Monthly Labor Review indicates that two-thirds will only survive two years, 44 percent survive four years, and 31 percent survive for at least seven years.

    Scholars have found over the years that insufficient capital is one of the main reasons for small business failure, coupled with lack of experience, poor location, poor inventory management and over-investment in fixed assets, according to the SBA.

    Between the September and December quarters 2010, the South Australian chain volume (trend) estimate of private new capital expenditure rose by 7.6% to $1,409m. Expenditure on Buildings and structures rose $31m (5.7%) to $566m, and expenditure on Equipment, plant and machinery rose $69m (8.9%) to $844m.

    Cash flow and the retail sector

    A cash flow positive property is one which enjoys a net gain based on the rental income being greater than costs associated with owning the property.
    In 2007-08, Australians had a negative net rental income of $8.6 billion, including $32.7 billion in rental deductions. This means that Australian property investors have claimed more rental deductions on their properties than they have received in rental income.

    While Australia faired reasonably well through the global financial crisis, there still remains some market uncertainty. Interest rates have increased, banks are being conservative with their lending, housing approvals are at low levels and the rental market continues to tighten.

    In the current property cycle cash flow positive properties are increasingly on the investor’s hit list, but many don’t fully understand what to look for, according to Robert Projeski of Australian Mortgage Options. The first step is to be clear on how much the property needs to return to be positive cash flow.

    The housing market crash in the US has surged a wave of massive home foreclosures and has led to tremendous drop in the prices of properties all over North America. The housing bubble that reached its zenith in 2005 started to weaken and crumble in 2006 and is now on the edge of bursting ensuing in a nationwide collapse in the real estate market and sharp decline in the housing prices.

    One of the main cause for the housing crash lies in the fact that banks and financial institutions were lending mortgages at 5 to 10 times the annual incomes of people; way above the safe value of 3 to 4 times. These financial powerhouses used aggressive terms and conditions but did very little scrutiny while providing mortgages and this led to an easy cash flow in the market which fueled the housing prices as well.

    The housing crash is expected to cost the banking system in the US a whooping $2 trillion dollars.
    US home prices fell from all-time highs in 2006. Home equity tapped by second mortgages had been a tremendous source of income then for families who used it for retirement saving, education, and simple consumer purchases. Three years later, many of those homes were worth less than their mortgages.

    The ten markets on the 24/7 Wall St. list of US “Housing Markets That Will Collapse This Year,” and several others like them, may not see a full recovery in home prices for years.

    A high level of home mortgage foreclosures continues in the U.S., with more than 8% of all residential mortgages in delinquency or foreclosure as of mid 2011.

    According to Smart Property Investment magazine, cash flow properties generally return a high rental yield of around 6-10%. In contrast, they normally hold a low capital growth profile – between 4-6%.

    The value of property is rooted in its potential to create an income stream or cash flow and property is generally accepted to be a long-term investment. The cash flow generated is therefore exposed to the effects of inflation, depreciation and interest over the holding period.


    The cash flow of a particular investment must therefore be analysed for weaknesses that the external influences of the macro-economy and the market environment may bring to a variance in the projected cash flows and hence, the resultant influence on the value of the investment.

    Cash flow and the retail sector

    According to the latest figures from the Australian Bureau of Statistics, retail sales remained flat in November 2011 after increases of 0.2% and 0.3% in October and September respectively.

    The trend estimate for food retailing in Australia rose 0.4% in November 2011.

    In Australia the trend estimate rose for supermarkets and grocery stores (0.3%) and liquor retailing (0.7%), but fell for other specialised food retailing (-0.6%).

    Household goods retailing in Australia rose 0.6% in November, as did cafés, restaurants and takeaways.

    The seasonally adjusted estimate for South Australia's retail turnover fell to $1,452.9 in February 2011. This represented a fall of 0.5% from the previous month ($1,460.2m), but 1.6% above the sales recorded in February 2010 ($1,430.3m). In contrast, national retail turnover rose to $20,534.7m in February 2011; an increase of 0.5% over the previous month and 3.6% above the sales recorded in February 2010 ($19,826.5m). South Australia's contribution to total retail turnover in Australia remained steady at 7.1% in February 2011.
    CFO CIO Finance Professional Treasurer

    Liquidity Management

    MyTreasur-e from Finpacific provides a cloud based treasury and cash flow forecasting solution to corporates desiring to take full control of their cash flow. The solution allows users to track budget, forecast and actual cash flows for multiple entities and currencies with state of the art user definable reporting. Available anywhere through the latest secure web technology

    Treasury Management

    MyTreasur-e software from Finpacific offers an integrated workflow enabled treasury module that meets all the trade processing, liquidity settlement and accounting needs of corporates enabling them to benefit from end to end automation and effective risk management.

    Credit Unions & Mutuals

    Finpacific in partnership with Finastra offers FusionRisk software suite where credit, market and liquidity risk can be analysed from one place, and regulatory capital, liquidity coverage ratios and stress tests can be managed to alleviate regulatory pressures.

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