Cash still rules the roostDOWNLOAD |
Deloitte Private has warned its clients that even though Australia has weathered the economic downturn better than most other developed countries, the economic climate is still tough and businesses need to be prepared to carefully manage their cash flow if they are to successfully manage out of volatile times.
“One of the most common reasons for business constriction, or even failure, is insufficient cash flow. It is therefore critical that in the current environment business leaders put into practice the art of good cash flow management. Now more than ever, cash is king,” said Austin Scott, Deloitte Private Partner.
“The global economic crisis was characterised by a massive contraction in the availability of credit to the real economy, and has resulted in some major structural changes in the Australian lending market.”
Businesses should not assume that their existing debt providers will automatically extend their lines of credit. Banks are scrutinising credit quality and seeking greater collateral in the current environment. Gearing levels viewed as being conservative by the banks 24 months ago may now be considered excessive.
“Good preparation is recommended prior to any application for new credit. Having a clear understanding of what funding providers are looking for increases the likelihood of securing a good deal.
A well thought out business plan that clearly articulates the business’ core strategy is vital as it demonstrates how the additional funding will be used to benefit the business and how it will ultimately be repaid,” added Mr Scott. Visibility into actual and future expected cash flows is essential for management to be able to plan and manage business’ funding requirements. Forecast models are vital for cash flow management; however a model is only as good as the quality of the underlying assumptions.
“In order for business owners to be prepared for worst case scenarios it is prudent they do sensitivity analysis as this usually provides them with good insights into the types of measures that may need to be employed if events actually do take a turn for the worst,” said Mr Scott.
Relying on short term borrowings is not ideal and business owners need to consider opportunities in order to create cash quickly and to preserve cash resources.
If working capital is tied up in slow moving and less profitable product lines then this can be rectified by undertaking an analysis of the current portfolio and focusing on the faster moving, more profitable items.
Many of Deloitte’s clients use 3-D, a new excel based cash flow tool that helps manage the challenges of operating in a tough economic environment.
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Cash still rules the roost
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Contacts
- Name:
- Jane Kneebone
- Company:
- Deloitte Australia
- Job Title:
- Corporate Affairs & Communications
- Phone:
- Tel: +61 3 9671 7389, Mobile: +61 4 1614 8845
- jakneebone@deloitte.com.au
- Name:
- Austin Scott
- Company:
- Deloitte Australia
- Job Title:
- Partner, Deloitte Private
- Phone:
- Tel: +61 2 9322 3861
- auscott@deloitte.com.au