CASH FLOW: The Lifeblood of Your Business

For many business owners the term cash flow is one that conjures up mixed emotions.  When cash flow is strong, things generally feel good but when there is a cash flow crisis, this can bring about worry, fear and frustration.  Not to mention opportunities that may be missed. It is worrying that a common statics promoted is that over 60% of businesses that go bust are still profitable, but just run out of cash.   So it is not necessarily that their business or industry isn't viable, but more cash is going out than coming in.

Typically a business owner does not have an accounting degree, but they do have fantastic ideas, an entrepreneurial spirit and a love for their business.  This very common knowledge gap can pose a challenge because without understanding the financial performance of the business, uneducated decisions can be made that result in a cash flow crisis.

So what steps can be taken to minimise a cash flow crisis?  There is no one hard and fast rule to managing a business cash flow, but putting it into the too hard basket will not make these challenges go away.  There are tools and approaches that can assist, and certainly reduce the risk of an unexpected cash shortage.  A simple cash flow forecast can be a valuable tool to a business owner to help in understanding the current and future cash position of the business.  This can bring about some peace of mind as it is much more comfortable knowing that an unfavorable cash position is temporary.  In addition a cash flow forecast can also provide information of an upcoming cash shortfall that then enables strategies to be put in place to mitigate this. 

There are a number of variables that will impact the cash flow of a business.  As a business owner do you understand the amount of working capital that your business will need each day/week/month to operate?  Have you assessed your pricing and operating costs?  Is your strategy to grow the business, which typically will consume cash?  Have you established what is the required stock to be holding, because your stock sitting on the shelves or in the warehouse consumes your cash flow.  What about the invoicing process?  Is this efficient and effective, allowing your customers to pay their accounts quickly and easily for your products or services supplied?  And then there is  tax, and by tax I mean company tax, payroll tax, land tax. personal income tax and PAYG as well as GST.

The definition of cash flow is quite simple.  It is the total amount of money being transferred into and out of a business.  Managing and understanding factors that can impact your business cash flow is not quite as simple.  If you feel you want to look at taking control and understand your business cash flow take the steps to do so.  If you want someone to discuss this in simple terms then we can have a look together.

By Felicity Cheeseman