Any business owner knows that having cash on hand is vital when running an enterprise. In fact you don’t even have to be a business owner to be aware of this – running a household is probably enough to convince you.
The value of managing cash flow
Maintaining a healthy cash flow often requires a delicate balancing act between money-in and money-out. Without the money-in at the right time, it may mean not being able to pay workers and contractors, purchase the supplies you need, pay debts and loans, or buy new equipment. It might also result in you not being able to meet tax office obligations such as PAYG, superannuation, GST and FBT.
Is cash flow the same thing as profit?
Some people get a bit confused about the difference between cash and profit. A business might be very profitable on paper while not experiencing much in the way of a positive cash position. This might happen for instance where debtors have been given credit (such as 30 days) to pay their accounts. The Profit and Loss report might show income for the month as higher than expenses – indicating a profit – but if no one has paid their account yet, there’s no real cash in the kitty to buy the morning coffee!
Preparing a cash flow budget
Setting up a cash flow budget or projection involves anticipating receipts and other income, and expenses and outgoings for a specific time period – which could be by week, month or quarter. This can be done on a spreadsheet, or by using special cash flow software. Some bookkeeping software packages have features or add-ons that enable you to enter in projected figures, try out different scenarios, and produce reports and graphs.
Preparing a cash flow projection or budget is a vital activity in any business. While it is not possible to predictwhat will happen in the next month or so with 100% accuracy, a cash flow projection gives you a reasonable estimate of what is likely to happen, and this enables you to manage your cash much better than if you simply operate on a day-to-day basis.
Methods to improve cash flow
A good way to bring in cash more quickly is to offer a discount for early payment of accounts – say, a 10% discount for paying within one week instead of 30 days. While this will reduce your profitability, it may be worth it to get cash in sooner and possibly avoid paying penalties or interest on your own late payments. You might also consider factoring an extra amount in to all your debtor invoices to allow for late-payments or non-payments, which can then be deducted off for early payments.
Other methods might include:
- Making some or all of your jobs payment upfront.
- Requesting an upfront deposit from customers on jobs over a certain value.
- Injecting some of your own funds into the business.
- Taking out a short-term loan to help you pay your debts and obligations.
- Applying for an overdraft from the bank, or an extension of your existing overdraft.
- Avoiding overstocking items, especially those that are slow-moving.
- Staggering payments to creditors where possible, rather than paying them all at once.
- Cutting down on expenses – such as reducing the number of employees or contractors you have.
- Selling assets and putting the money back into the business.
If you need assistance in managing your cash flow, or you just want to make sure you’re doing it as efficiently as possible, Jim’s Bookkeeping (Brisbane Western Suburbs) can help.