Essentials

Cash flow essentials

Cash is the fuel that drives your business. A business can be making profitable sales and still go under, simply because it doesn’t have cash on hand to pay the bills.

But good cash flow is about more than just staying afloat. It’s also about making your business as efficient as possible. By taking control of cash flow, you can reduce the amount of money you need to keep your business running from day to day and earn a higher return.

The trouble with cash flow

Cash flow can be hard to pin down. Traditional accounting tools are designed to produce balance sheets and profit and loss statements — snapshots of your finances at a particular moment. They don’t capture your changing cash requirements through the year.

Even the cash flow statement in your annual accounts is backward-looking, a summary of how your cash balance has changed over the last 12 months. While it can help you diagnose past problems, it can’t help you anticipate future ones.

Many businesses also have their cash scattered across multiple financial institutions, making it hard to grasp their current cash flow position without time-consuming reconciliations.

Taking control

The first step towards taking control of cash flow is to consolidate your banking with a single institution, simplifying administration and giving you complete visibility of your current position through your online banking service. You’ll save money on fees, too.

Next, you need to create a cash flow forecast. Your forecast shows exactly how much cash will flow in and out of your business each month. It helps you identify potential crunch points and makes sure you have cash on hand to meet them. (You can find a cash flow forecasting and tracking template on our resources page.)

Tracking your performance

Next, you need to track your actual cash flow performance from week to week. That means you need an easy way to assess your current cash position. An important first step is to consolidate your banking so that you have complete visibility across all your accounts.

Cash flow facts

  • 43% of business owners say managing cash flow is a challenge (Commonwealth Bank and Investment Trends Business Owners Survey, November 2007).
  • Around two-fifths of the companies that failed between 2004 and 2007 did so because of inadequate cash flow (Australian Securities Commission Report 132, External Administrators, June 2008).
  • Businesses are taking longer to pay their bills, with average payment terms blowing out to 56.5 days (Dun & Bradstreet, January 2009).