Updated November 2022

Does your business have enough cash?  Well, that all depends!

Cash flow is the lifeblood of any business.

For many business owners, the pressure of increased running costs, whether that be supply costs, employee costs or finance costs, requires a laser focus on cash flow management to ensure bills continue to be paid.

From a planning perspective, having a clear picture of how your cash flow position is tracking leads to clearer pathways in navigating and implementing short and long term goals the business has set out to acheive.

Regardless of the reason, cash flow monitoring should be a key component in managing a business’ finances.

What is Cash Flow?

Cash flow represents the total amount of money going in and out of the business, usually in the form of sales receipts and expense payments.

Having a sufficient cash balance usually depends on what your short-term commitments are and when they will fall due, meaning that planning for surplus and shortfalls in cash is key. In some cases, despite experiencing a highly profitable period, cash may be spent without proper consideration of significant upcoming requirements, such as tax obligations or employee obligations.

How can you best manage your Cash Flow?

Planning and monitoring cash flow is one of the most important actions you can take when operating and managing your business. The benefits of understanding how your business manages its cash flow is clear. For example, having a planning or budgeting process in place may provide potential lenders with a greater understanding of cash flow requirements to aid an application for business finance.

There are many ways to manage your cash flow, with three key methods including:

  1. Creating a budgeted cash flow report;
  2. Monthly monitoring; and
  3. Weekly/daily monitoring (where required).

Budgeted Cash Flow Report

A budgeted cash flow report can help businesses forecast cash flow requirements over time. This process is usually completed on an annual basis and is analysed on shorter time periods (depending on business operations). For example, monthly reporting may be more relevant where customer contracts stipulate payment terms of 30 days, whereas shorter periods may be more applicable where a business receives and is required to spend in high volumes.

In preparing a budgeted cash flow report, you will need to estimate and record the cash inflows and outflows which may include the following:

  • Cash Inflows: cash sales, sales on accounts including when you expect your customers to pay, sales of assets, cash injections from borrowings or owners’ funds, interest income, and any other sources.
  • Cash Outflow: direct costs, loan repayments, overheads (e.g. telephone, insurance, electricity, and wages), asset purchases, taxation commitments, and also personal drawings from the business.
  • Net Cash Flow: subtract the total outflows from the total inflows to calculate the net cash flow position of the business as either a cash surplus or deficit.

Monthly Monitoring

An annual budgeted cash flow report can provide a framework to regularly assess how your business is performing. By comparing actual performance against the forecast budget, a business can gain valuable insights into how assumptions on cash requirements change and how the business may need to adapt. The budgeted cash flow report can then act as a decision-making tool to manage your business operations.

For instance, where your cash flow position is less than your budget, you can investigate why and implement strategies to improve the cash position. You can begin to ask “Is it due to your customers taking longer to pay their accounts?”, “Are your overheads costing more than budgeted?”, and “Are you drawing too much out of the business to meet your lifestyle needs?”.

Alternatively, should your cash position be greater than your forecast, you can then consider options such as bringing forward future capital investments or paying down business debts.

Weekly/Daily Monitoring

Sometimes it is necessary for a business to establish a daily or weekly monitoring reporting regimen to manage cash flow.

A simple weekly or daily monitoring tool can be established to assist tracking where money is coming in and going out, as well as incorporating basic estimates for where cash is moving in the next say two to three months ahead.

This tool can provide a valuable short term focus on cash flow by identifying when extra cash is available or where likely shortages could be experienced.

Daily or weekly monitoring assists to provide warning signs to avoid future financial problems and opportunities to create various cash  flow strategies if things are getting tight.

How we can support you

At Davidsons, we work with clients in preparing Budgeted Cash Flow Forecasts. The process provides immediate feedback as to the position of cash flow over the next period (usually 12 months), along with a scoreboard to assess how the business is performing and what pro-active decisions are required to maintain the lifeblood of the business.

If you would like to learn more about our Cash Flow Forecasting services, do not hesitate to get in touch. To speak to our team, please contact our office on (03) 5221 6399 or at info@davidsons.com.au.

This article was written by Senior Accountant Troy Nolan and Accountant Liam Robinson.

Disclaimer: this information is of a general nature and should not be viewed as representing financial advice. Users of this information are encouraged to seek further advice if they are unclear as to the meaning of anything contained in this article. Davidsons accepts no responsibility for any loss suffered as a result of any party using or relying on this article.