Cashflow management

Cashflow is the term for the movement of money into and out of a business. Cashflow is important because it is necessary for the business to stay liquid enough to pay their creditors and their bills. Read more

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Cashflow management

Cashflow is the term for the movement of money into and out of a business. Cashflow is important because it is necessary for the business to stay liquid enough to pay their creditors and their bills. A business which is profitable but has poor cashflow may find that they become insolvent, despite generating a healthy margin. This might occur if a business only generates revenue a couple of times a year, but incurs expenses all year round. Good cashflow management ensures that there is always enough money on hand to pay debts when they are due.

Forecasting inflows against outflows

Businesses typically create cashflow forecasts for a year long period and break it down month by month. These forecasts detail how much is expected to be made and how much is expected to be spent. These statements also help businesses keep track of when certain payments are due, so that funds can be set aside and allocated for those purposes.

A cashflow statement includes:

  • total monthly cash inflow (sales of products or services, asset sales, capital gained from loans or investments, interest on funds, returns on investments and any other sources)
  • total monthly cash outflow (all business purchases, loan payments, supplies, utilities, wages, taxes and other expenses)
  • net cashflow (the inflow minus the outflow)
  • opening balance for the month
  • closing balance for the month

If a business is generating over $70,000 revenue per year, it will need to include GST payments in its cashflow statements.

Monitor the actual cashflow

Forecasts must be carefully monitored against the reality to ensure that all expected funds are received and that expenses were predicted accurately. If necessary, forecasts must be adjusted to ensure there is not a shortfall. Payments received should match the invoiced amounts, and payments made should match receipts. Any and all discrepancies should be followed up immediately.

How to improve cashflow

Ultimately, the calculation is basic and there is only one way to increase cashflow - increase revenue while lowering expenses. With that said, here are the most common methods for doing so:

  • Generate more revenue: the most basic way to increase cashflow is to earn more money. Businesses do this by advertising more, increasing prices or expanding their business to new markets.
  • Reduce expenses: moving to a cheaper office, utilising renewable energy, putting in place policies to minimise waste, encouraging employees to work from home and moving to a paperless office are all ways that businesses can reduce its overheads and operating expenses.
  • Monitoring stock closely: holding too much stock results in a business having less liquidity and increased storage costs. Holding too little stock may result in missed sales and revenues. Therefore, monitoring supply and demand closely is essential to strong cashflow.
  • Manage accounts effectively: chasing overdue accounts regularly and persistently is vital for strong inflow. It’s also important for businesses to maintain good debt policies to ensure they continue to receive credit from their suppliers, otherwise they may lose their access to services and supplies on credit which will significantly impact their future cashflow.
  • Reviewing financial practices: selecting the right bank, the right type of account, the right business structure and the right payment methods can ensure that a business generates the most income and incur the least expense. Some payment methods make funds available to a business faster than others, but may carry extra fees.
  • Renegotiate contract terms: by seeking longer terms on debts and shorter terms on credits, a business can increase its cashflow.