Why Manage Cashflow

"David Balwin

CPA | Accountant | Business Advisor

One of the biggest issues many small businesses will face is their failure to plan how much cash they will need in the foreseeable future.  Therefore, planning needs to occur in relation to how much cash the business will need (preferably over the next 12 month period) and how the business’s current practices can be improved to enhance the forecasted cashflow.  As a starting point business owners need to sit down and map out, on at least a month to month basis, what the expected cash the business will need to meet commitments and what the expected cash the business will generate from sales or services. Businesses need to be as honest and as accurate as possible, including all revenue and expenses items; for example,

List Revenue (including cash from):

  • Sale of goods and/or rendering of services;
  • Royalties, commission, fees;
  • An insurance entity for claims, annuities and other policy benefits;
  • Tax refunds;
  • Receipts from contracts;
  • sale of property, plant equipment,
  • sales of equity; and
  • receipts from repayment from loans made to other parties;

List Expenses/outgoings (including cash for):

  • payments to suppliers;
  • payments for bank charges;
  • payments to employee including PAYG, superannuation, leave loading and long service (if taken in forward period);
  • payments for insurance policies for building/contents/stock/loss of wages, workers compensation;
  • payments due under contracts;
  • payments to acquire property or equipment;
  • cash advances or loans made;
  • payments to owners where redeeming equity; and
  • mortgage, lease payments.

This list is not exhaustive, however, hopefully gets the thinking juices going about where businesses’ money can go.  A great resource for working up these lists is the last 12 months cashflow of the business.

Also, make sure the one-off payments and receipts are not forgotten – they could, in the case of receipts, get you over the line in a tight period or, in the case of a payment, cause the business severe stress if not planned for and suddenly appears.

Once expenses/payments and receipts have been allocated to the relevant month the business is now in a position to see where it stands.

How does it look?  Is enough revenue being generated to cover costs over the period (including salary for the business owner/s)?  Are there any months where expenses are greater then receipts and has the business sufficient reserves to meet the shortfall?

If the business needs short term funding for a period during the year, now is the time to plan the best way to meet the shortfall: not when it happens!  By planning and researching options, the business will have a far greater chance of securing the required funding at the best rate, in time to meet payments.

Remember, even though things are good and the business is generating positive monthly revenue, there maybe something lurking around the corner that is out of direct control.  By ensuring access to other funds (e.g. overdraft/loan) or even better still the business’s own reserves that have been put aside during the goods times, the business has a far greater chance of surviving.

By having a proactive cash flow projection based on sound numbers, which is constantly reviewed and adjusted for changes in financial circumstances, the business is in a good position to achieve the desired result.  Remember to always seek professional advice from properly qualified people as part of your business strategy.  It is always a good idea for the business to discuss any issues or management matters with its accountant, legal advisor, financial adviser, financial institution and/or other business professional, well in advance.