What is cash flow management? A guide for small businesses.

As someone who could be the owner, financial controller and senior employee of your business, you have plenty to think about. Keeping your enterprise solvent is one of the most important considerations – and that's all about good cash flow management. Here are some tips for keeping your cash inflows higher than your cash outflows.

What we'll cover

• The definition of cash flow
• Balancing your books
• Improving cash flow
• Tracking and managing cash flow.

 

What is cash flow?

Cash flow is simply a measure of how much cash is coming into your business versus the money going out of it. 

 

If there's more coming in than going out, you have positive cash flow – which is ideal. If you're spending more than you make, you have negative cash flow – although this may be expected initially if you have start-up costs.

 

The money you make

Your business income might include elements such as: 

 

• Immediate payments for the goods and/or services you provide
• Future payments following the issuing of invoices
• Any grants or subsidies you receive
• Other income, such as investment interest and dividends.

 

 Accountants and bookkeepers call the money you are owed ‘accounts receivable'.

 

The money you spend

Your business expenditure might include elements such as:

 

• Immediate costs associated with providing goods and/or services
• Future costs based on invoices you have yet to pay
• Salaries, wages, super and employee insurance
• Tax and accountancy expenses
• Rent, electricity, gas, phones and internet
• Vehicle costs
• Maintenance and repairs
• Interest on debts and/or debt repayment.

 

The money you owe for goods and services is called ‘accounts payable'.

Balancing your books

People talk about ‘balancing the books' when the debit and credit sides of a business balance each other out, including any profits achieved or losses sustained.

 

You could view and assess your cash flow in much the same way by calculating your ‘cash position' on a regular basis.

 

At the end of each month, for example, your operating cash flow position is simply:

 

(Total cash in) minus (Total cash out)

 

If this number is:

• Positive – you may have excess cash you can spend, invest in your business, or set aside in a savings account for unexpected expenses.
• Negative – you may have to find alternative cash sources (such as a business loan) to keep your business running, or identify ways to reduce operating costs.
• Around zero – you have no free cash flow available for savings, investments and business purchases.

 

Having a business bank account that's separate from your personal finances will help simplify this calculation each month. It can also help you track performance, manage income and business expenses, plan for tax time, and have a clearer view of your cash flow and overall financial position.

 

With Westpac for example, you can choose between a $0 monthly fee business account  (Business One) and an added value business account  (Business One Plus) that gives you access to exclusive discounts on popular business products and services. To simplify financial management and bookkeeping, you can connect your account to accounting software such as MYOB and Xero.

How could I improve my cash flow?

One way to optimise cash flow is to speed up your ‘working capital cycle', which is the time it takes to turn existing assets into cash.

 

Let's say you paid a wholesaler for a box of widgets, then sold them on to a customer a month later for a profit, then received payment for them a month after that. In this instance, the working capital cycle is two months. Reducing that cycle to six weeks may improve your future cash flows.

 

Three ways you could improve your cash flow, including some that will help reduce your working capital cycle, are:

 

1. Get paid faster

Late payments can cause a cash flow problem. You might get paid quicker if you:

 

• Invoice customers promptly
• Chase up slow payers
• Establish or renegotiate payment terms
• Offer early payment discounts
• Use an EFTPOS machine that settles instantly into your bank account.¹

 

It's also worth letting customers pay you the way they want to, by offering a choice of payment methods such as cash, cheque, bank transfer (by sharing your BSB and account number or if you're registered for PayID®, just your ABN or phone number) or credit card. If you're taking face-to-face payments, you can now take card payments using just your phone, with the Westpac EFTPOS Air app on your compatible mobile.

 

2. Pay your bills later

We're not suggesting you pay suppliers late. But if you're in the habit of paying your bills early, perhaps think about just paying them on time instead. And it could be worth reviewing your payment terms and renegotiating them if necessary.

 

3. Manage your stock or supplies smarter

Actions to consider include:

 

• Keep your records up to date
• Adjust stock levels in response to seasonal trends
• Order less, but more frequently
• Think of ways to shift excess/dead stock.

 

4. Reduce your costs and overheads

Set time aside on a regular basis to review the market, aiming to reduce cash outflow. You may be able to improve your cash position by trimming the costs associated with:

 

• Rent
• Stock and supplies
• Gas, electricity and other utilities
• Phone and internet
• Business travel and transport.

How can I track and manage cash flow?

There are two key documents you could use in your business to assist with managing cash flow.

 

Cash flow projection

Cash flow forecasting helps you plan ahead, anticipating cash inflows and cash outflows throughout the year to predict the likely availability or not of funds at specific times.

 

A company's cash flow can be subject to seasonal swings and they may have to pay expenses such as registrations and insurance premiums at particular times. So this type of cash flow analysis helps with future planning.

 

Search 'cash flow forecast template' to download a calendar you can use for future cash flow projections.

 

Cash flow statement

These financial statements are used to show how much of your cash inflow comes from your business operations versus cash injections such as loans and income from selling assets. This may help you set targets for shifting the balance towards generating more income.