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Cash is KING...& Profit is the PRINCE(SS)

There are many thousands of excellent small & medium businesses in Australia. Many of these businesses will find themselves, at some point in time, with an ATO liability. The key question every business owner, accountant, business consultant and Banker should ask themselves when this happens is ..... WHY?

There are only EIGHT possible reasons why a business might need to rely on the ATO as a source of funding: -

  1. Sales have declined and profits are down OR Sales have increased so quickly the business can't generate cash quickly enough to meet demand

  2. Margins are reducing resulting in a decline in Gross Profit

  3. Operating Expenses are increasing faster than underlying Gross Profit

  4. Debtors are taking longer to pay (or your debtor book is increase in overall $)

  5. Stock levels are increasing OR Stock turn is slowing

  6. Creditors are requiring payment more quickly (or your creditor book is reducing in overall $)

  7. Capital - either you are spending cash on capital assets OR you are taking more cash out of the business to do something (invest, buy a jet ski etc)

  8. Debt Structure - the existing debt structure and/or repayment program on that debt is not aligned to the business

The presence of an ATO debt indicates that something isn't (or hasn't been) right in the business. It's a warning sign. It's important that business owners and their advisors understand exactly what has caused the arrears in order to prevent that same issue occurring again (or getting worse).

Cash is King in a business - ultimately cash repays debt and allows the business owner to actually "take" a return from all of their hard-work. Being short of cash is to be expected from time to time in business ... and it's okay so long as everyone understands the "WHY".

But you can't just focus on Cash... for Profit is the Prince (or Princess) which allows a business to rule for the longer term. In the end you need both the King & the Prince (or Princess) to be fit & healthy.

#creditskills #cashflow

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