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
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:
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: