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BSB 650 000

Managing your cash flow

Cash flow management is a key aspect of financial management for any business when planning for its cash flow requirements.

Cash flow template* Profit and Loss template*

It is important not to confuse profit with cash. Generating a profit is obviously important but being profitable does not necessarily mean having readily available funds to be able to pay your commitments when they become due. A business can fail because of a shortage of cash even while being profitable. Cash is therefore the life blood of the business. If a business runs out of cash and is unable to obtain new finance, it is at risk of becoming insolvent. 

Strong cash flow management is therefore crucial and the suggestions set out in this guide may help you to improve your financial cash flow position.

Put simply, cash flow is the money coming in and out of your business – If you have more money coming in than out, you have a positive cash flow. If you have more cash going out of your business in terms of debts and overheads than cash coming in from your sales income, then that’s often referred to as negative cash flow. 

To achieve positive cash flow or address negative cash flow, it’s important to plan and prepare your financial forecasts. This will help you plan for upcoming expenses and ensure you have strategies in place to pay your debts and expenses when they become due. In periods where negative cash flow is identified, it is imperative that a business is able to fund this shortfall.

A cash flow forecast can be one of the most important tools in managing your finances. It tracks all of the money flowing in and out of your business and can reveal payment cycles or seasonal trends that require additional cash to cover payments.

It is useful to prepare your profit and loss forecasts in conjunction with your cash flow forecasts. Understanding your profit projections including the level of sales required to breakeven and how and when this converts to cash flow is also important.

You may find the links below useful in developing your financial projections:

You may find the following tips useful when completing your financial statements but it is also important to consider obtaining professional advice in developing your financial statements from either your accountant or professional business advisor at this stage of your business planning

Take out the guesswork

It’s vital to have the most accurate and up-to-date data in your forecasts as possible. If you simply guess or make up figures, you’ll be setting your business up for an unrealistic outcome. It is therefore important that you can demonstrate the basis of assumption for any of your projections both in terms of the cash coming in and out of your business. Whilst this will potentially require detailed and careful research, you should end up with a more accurate financial forecast.

Be realistic

As a business owner, it’s only natural to want to see the best possible financial outcomes for your business. But when you’re creating your forecast, it’s important to be realistic with your projections. If you’re business is just getting started or is in a period of uncertainty, you could create three different projections – a negative (least favourable) projection, realistic (most likely) projection and an optimistic (best case) projection. This can help you plan and strategise for a wider range of outcomes.

Monitoring performance

Cash is the lifeblood of your business and it is vital that you closely monitor the financial performance of your cash flow projections.  By comparing your forecasts against your actual financial results, you can continually fine tune your business management and develop strategies to meet any new challenges ahead.

Tips to managing your cash flow

To help ensure you have enough cash available to pay your creditors, employees and other payments on time, consider these simple tips for staying on top of your cash flow.

Stay on top of your debts

Collecting debts is all part of owning a business, and it’s important to always know when you can expect payment. Some ways to help manage your invoices more efficiently include :

  • Make sure you always specify a pay-by date on your invoices.
  • Follow up on outstanding customer payments as soon as you can.
  • Issue your invoices directly after you provide your goods or services, rather than waiting until the end of the month.
  • Offer discounts to customers for paying their invoices early.
  • Ask for a deposit from customers ordering larger or more expensive items or services.

Review your prices

It may seem daunting to raise your prices, but it may be something you’ll need to review and consider to address inflationary costs and protect your all-important profit margin. This will obviously need to be considered in line with market competition and your overall value proposition but raising your prices by just a small amount can potentially have a positive effect on your business cash flow as well as profitability.

Check your assets

Have a look around your business and the equipment you use. Is there anything your business could survive without? Selling unwanted assets can be a good way to improve your cash flow. You could also consider leasing your assets to help spread the cost over a longer period.

Watch out for overheads!

It’s a good idea to keep an eye on your expenses over time. Regularly analysing your expenses to identify areas where you could reduce or re-negotiate costs or seek alternative providers is good management practice. For instance, changing to an off-peak internet plan could save you money while still servicing all your needs as with other consumables or direct services that you may be paying for.

It is also worth reflecting on whether you need to re-arrange the timing of your expenses or make provision for periodic payments for larger expenses that more closely align to your cash flow requirements.

Excess stock

Unused or surplus stock is not the best use of your cash which could otherwise be invested in your business. To maximise your stock control it will be important to stay on top of your inventory, be aware of products that aren’t selling and think about discounting stock that you’re having trouble selling. Moreover, consider modifying the quantity and/or timing of your stock purchases to coincide with periods of higher cash flow demand.

Schedule your payments

Determining when you pay your own invoices can make a big difference to your cash flow. For instance, if you pay your expenses and/or invoices after 15 days but you don’t receive payment of your invoices until 30 days, you will have a disparity in your cash flow that will need to be managed and accounted for. It is always prudent to plan the timing of your payments to maximise your cash flow and to ensure wherever possible you negotiate terms of trade that are at least equal if not favourable to your business.

We’re here to help

To find out whether we can help you with your cash flow requirements, drop into your local branch and chat with one of our team today, or call us on 13 19 87.

Managing your cash flow
Managing your cash flow

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