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Cash flow

Cash flow

No cash flow invariably means, no viable business.

Last year, ASIC figures quoted by the Sydney Morning Herald, revealed that 44% of insolvent Australian companies reported inadequate cash flow or high cash use as the number one reasons they went bust.

And the cash flow impact on business may be higher than these figures show with other agencies, such as The Victorian Government’s business website reporting that, “80% of businesses fail because of cash flow problems”.

What is cash flow?

Basically, cash flow is the money that comes in and out of your business. Cash flow comes in, in many forms including sales, loans, and revenue from operations.

Cash flowing out of your business typically comprises expenses and investments.

The aim of the game is to maintain a positive net cash flow – or to put it more simply, to have more money coming in than going out, so you don’t run out of it.

Know it, show it, grow it

It doesn’t matter if your business is big, small or somewhere in the middle.  It doesn’t matter if your products or services are exceptional - if you want to be successful you need a rock solid, cash flow management strategy. 

Here are five basics that will help you put one together.

Know your cash flow statement

Your cash flow statement tracks what money enters and exits your business. It lists all incoming and outgoing cash. It’s your monthly financial barometer and compass.

Get to know it, review it and maintain it. If you don’t have the time, employ someone who can. 

Know your current cash balance

This helps you make informed business choices. For forward planning purposes, always anticipate what you expect your cash balance will look like in six months – you can use your cash flow statement to help project what’s coming.

Not sure how to put one together? Download the cash flow statement template on this page.

Minimise your overheads

If you feel you're headed for a cash flow crunch, or if you just want to get leaner in terms of expenditure, take a good look at your overheads and think about where you can save money.

You may be better off leasing capital equipment rather than buying at this point in your business cycle, or you could relocate to cheaper premises, or go online.

Optimise getting paid on time

One of the single biggest factors for a business’s cash flow is being paid for work done, on time.  In 2013, the collection agency Dun and Bradstreet estimated that over AU$19 billion was locked away from businesses beyond the widely accepted 30 day payment term.

Delays to payment can put a serious hole in your cash flow.

This is where good client communication backed up by sound administration comes into play. It’s important to let your clients know exactly what your terms of engagement and payment are.

A good strategy is to charge 50% up front or set up a milestone payment schedule. Offering incentives for early payment is another way of getting the cash flowing.

Most importantly sending out your invoices promptly, tracking payment schedules and following up on any late payments is essential to maintaining positive cash flow.

Meeting a shortfall

It’s best not to  wait until you have one, so make it part of your cash flow management strategy. Start by preparing cash flow projections for next year and build it into your business plan.

Consider setting up or planning for a line of credit or bank loan. You don’t have to take one out but it’s always good to know what’s possible and when. 

Disclaimer: This is not financial or professional advice. We recommend you obtain independent advice before making any financial decisions.


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