It’s a feeling every business owner knows. The wages need to be paid, that big debtor is taking their time to pay you, and the GST is due at the end of the month! Sure, it’s a temporary issue – but is there enough cash in the bank to pay for everything? Cash flow management is simply a matter of making sure your business has enough cash to meet expenses when they need to be paid.

Sounds easy, right?

For most business owners, keeping track of your expense and revenue items (each operating according to its own highly uncertain timetable), can be a difficult and stressful exercise.

Profit and Loss Statements and Balance Sheets prepared from your internal accounting program focus on book profit, not cash. Whilst it is vital to focus on the business’ profits and asset position, it is also important to understand the flow of cash in and out of the bank account. Sometimes a very profitable business can have poor cash flow, particularly if your customers take a while to pay and you need to pay your suppliers quickly. Also, businesses experiencing high growth can suffer from cash flow problems because there can be a lag, as sales grow and then the cash comes in.

But there are many simple things a business owner can do to put their business on a steady cash flow footing. Preparing monthly cash flow projections is just one of them.

Having a tailored cash flow projection outlining each month the cash that the business will receive and the costs that will need to be paid gives business owners a plan to provide confidence that the funds will be there in the bank when you need them. Your projections should be reviewed on a regular basis to ensure they remain relevant.

Cash flow projections should be prepared for one to five years as a minimum, depending on your business’ needs.

Often reviewing your cash requirements highlights areas in your business where simple improvements can be made for big results!

Cash Flow Improvement Formula

The cash flow improvement formula for a healthy business should aim to:

KPI Formulas

By doing so, surplus cash exists to make asset purchases, pay debts, and pay dividends and drawings to owners.

Tips for improving cash flow in your business:

  1. Set your credit terms for your customers carefully and ensure that you follow up with your customers if they exceed these terms. Offer alternative methods of payment, such as direct debit or credit card, and ensure customers agree to payment terms before they purchase. Asking for regular, standardised payments from customers is also a way to standardise cash flow.
  2. Pay your creditors on time, taking advantage of their credit terms and any discounts offered for early payment. Approach larger creditors to organise payment plans to spread out those bigger payments that can otherwise make a dint if your cash flow.
  3. Smooth out the lumps by understanding the cash flow needs of your business. Having relevant projections can help you do this.
  4. Use financing products such as overdrafts effectively.

For assistance today in developing projections for your business of its cash flow requirements, contact us on 07 3833 3999 or