Understanding your cash position

Your cash position is a measure of the money you're making in your business versus the money you're spending to keep it operating. A strong cash position indicates that you have a healthy cash flow, which is a sign of a successful business. Here’s how to measure it.

What we'll cover

• The importance of your cash position
• Assessing your cash flow
• Calculating your cash position
• Simplifying cash position calculations
• Cash positions in the world of investments.

Why your cash position is important

Knowing your cash position each month, quarter and year could help you understand whether your business is on the right track financially – and trading with positive liquidity. That is, making more money than it spends.

 

It's important to recognise the ups and downs of your cash position. For example, you may be in a sector that's subject to seasonal fluctuations meaning that a positive cash position in one quarter may have to support your operations during times when your liquidity ratios (income versus expenses) are negative.

 

But as long as your cash flow statement indicates a positive cash position across the whole year, overall, you're making more than you're spending, which is a good sign.

Assessing your cash flow

The first step to calculating your cash position is to know your cash flow – which is all about inflows and outflows. Preparing a quarterly cash flow statement for reporting on income versus expenditure will help you to establish your cash position and identify any opportunities for growth and investment – or alternatively, the need to cut costs.

Your cash inflows include:

• Immediate payments by cash or card
• Accounts receivable in the future from invoices issued
• Other income such as interest on savings, dividends and government grants.

Your cash outflows include:

• Payments to suppliers
• Paying off current liabilities such as loans
• General expenses such as rent, electricity, phone, internet, office supplies, advertising, accounting fees and maintenance.
• Periodic costs such as tax, GST, PAYG, super and insurance
• Staff salaries.

Calculating your cash position

Calculating your cash position for any given period is as simple as taking your outflows away from your inflows. Ideally, you’ll end up with a positive number. That may fluctuate over accounting periods, but at least you'll be able to spot and react to trends.

 

With a regular positive cash position, you could consider investing in growth or simply setting cash aside in a savings account for unexpected expenses. A negative cash position may mean that you have to find alternative cash sources to keep your business running (such as a business loan), or identify ways to reduce operating costs.

 

It's important to remember that your cash position at any time is not necessarily an indication of the success or potential profitability of your business or indeed a predictor of failure. Your cash position simply shows where the money is, and if you have any gaps to cover.

Simplifying cash position calculations

Many small business owners find that separating their personal financial affairs from their business finances with a separate business bank account simplifies cash flow reporting and accounting in general. And clearer business-only bank statements can help reveal opportunities for cost saving too. 

 

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.

Another type of cash position

You may have come across the words 'cash position' in a different context, which we'll cover briefly. It can also refer to the balance of an investment portfolio held as cash.

 

If, for example, an investment fund invests in a mixture of assets such as stocks, mutual funds, bonds and cash deposits, its 'cash position' is the amount held in cash or cash equivalents that's readily available to invest. Simply holding cash reserves could be considered low risk, but a fund's ability to grow will be impacted by too much of its current assets held as cash.