Funds flow is what it’s all about – the secret to business survival. Let me paint you a picture…
Assets are money: are yours working hard enough?
In an earlier column we introduced the concept of “funds flow”, which is a critical concept underlying your financial information.
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Initially a business sources funds from equity (owner’s capital contribution), debt (borrowings) or both. Those funds will be used to get the business started, and will be used to acquire assets such as inventory, premises, vehicles, systems and the like.
Here is an overview of what this might look like using “colour accounting” to tell the story. Remember, yellow indicates the source of funds to the business and green indicates the use of funds by the business – same $500,000 of funds, just two different perspectives; where the funds came from and how those funds have been used.
You begin trading. The business is now using its assets to generate the third and most important source of funds, income. You can see on the next diagram that (1) the assets are used up (become expenses) in the process of (2) earning income. The income earned (3) provides new funds that can then be used to replace the used up assets (for example, inventory), pay overheads, repay debt, buy new assets, pay taxes and reward the owners. It’s a continuous cycle.
The sole purpose for the assets of your business is to generate a return and in this competitive world of business the name of the game is to generate the biggest return with the least amount of assets. All other things being equal, the faster you can turn over your assets, the greater the return.
- Measure the returns your assets are making so these can be managed. Do this in total and also by important categories (such as inventory). How much extra would Woolworths make if it could increase its inventory turnover by a single day? It knows its key indicators – do you know yours?
- Not all your assets are necessarily listed in your balance sheet. For example, are you using all of the potential value embedded in your IP? How many of your patents are not being used fully, or at all? What new uses might there be for an existing idea?
- Assets can consume a lot of the funds of the business. Review your processes and think outside the square in terms of your assets. What do you really need? Work through your key processes, preferably with the people who work in those processes. Where can you innovate to keep ahead of your competitors?
A simple example to get the juices flowing. Years ago some retailers decided that rather than buy stock from certain suppliers and then offer it for sale, it would be much better (for them) if they accepted the goods on consignment. Then the retailer only has to pay the supplier for the goods when they have been purchased by the customer rather than in advance. Can you put a modern spin on this?
One more example. My company, Accounting Comes Alive, recently bought one of those pull-up banners from a contact our Canadian office had in the USA – very cheap. We bought one and within days it was delivered directly to us from their sub-contractor in Malaysia. The US company didn’t have a factory, machines, stock or a shipping department. Just a handful of people organising it all and a you-beaut website.
Mark Robilliard and business partners Peter Frampton and Carmen Mettler started a journey to find a new way for anyone to ‘get accounting’ and use it in their job and life to create value. Accounting Comes Alive was born and now provides workshops all over the world using their unique Colour Accounting™ learning system that really does work, for anyone.
To read more Mark Robilliard blogs, click here.