How cash flow management helps you run your business better

Cash flow management is a critical tool for managing your business well and helps businesses avoid surprises with their bank balance.

A cash flow statement is retrospective and a cash flow projection or budget looks forward and both are fabulous management tools.

Good cash flow statements and budgets can help you answer common questions such as:

• Why do my financials say I am making a profit but I have no money in the bank?
• Can I afford that overseas holiday next year?
• When can the business afford to upgrade equipment or machinery?
• How is my inventory control?
• Can I afford to put on a new employee?
• Are my credit and payment terms working for me?

Your professional bookkeeper has the information and the skills to help you with cash flow management.

What exactly is a Cash Flow Statement?

A cash flow statement is simply a record of the cash moving in and out of your business. Cash flow relates back to how much cash is sitting in your bank account at any point in time. “Cash Flow In” is not just sales, but can also include rent received, GST on goods sold, funds that you have put into the business to “top up” and so on. “Cash Flow Out” includes expenses, payroll to employees, BAS payments, loan repayments and any money you take out of the business.
A cash flow projection or budget takes this information to predict into the future.

What is the difference between a Cash Flow Statement and a Profit & Loss Report Statement?

A Profit & Loss Statement measures sales and then deducts expenses such as wages, superannuation, purchase of supplies, bills, rent and so on. The net figure is your profit:
Sales - Expenses = Profit

It is perfectly possible for a business to show a profit and yet have no money in the bank.
Profit ≠ Cash in the Bank

Have you ever wondered how that can be?

The cash flow statement fills in the missing pieces and there are 2 main reasons – included items and timing differences:

1. Included Items – the Profit & Loss does not include some items which will affect your cash flow. Examples are loan repayments, hire purchase payments, rental bonds, deposits paid and withdrawals made by the business owner for living expenses.

The Profit & Loss also shows sales and expenses without the GST amounts included.  A sale of $1,100 will show in the P & L as income of $1,000. The business will have to give the $100 to the ATO when it lodges the BAS so it is not part of the business income. The reverse is true of expenses.

2. Timing Differences – the Profit & Loss shows an expense or sale when it is entered into the accounting system – usually when the business issues an invoice or receives a bill or when there is a payrun.  It does not tell you when the cash is received into the bank or when the bill is due to be paid.

As an example: if a business pays staff wages on 1 July 2023, the expense in the Profit & Loss will look like this:

This is not the same as the cash coming out of the bank.

If the tax withheld on employee wages in the above example was say $3,000, then the cash flow budget may look like this:

In this example, a good cash flow budget will recognise that only $7,000 will be needed on 1 July, $3,000 cash will be needed in August and $1,100 needed in October. Similarly, GST is collected and spent but it is only when the BAS is lodged that the business gets a GST refund or has to pay the GST owing to the ATO.

How to Construct a Cash Flow Statement and Budget

Start by looking at past cash flow. Your bookkeeper will be your best ally for this information and to prepare a Cash Flow Statement for you.

Then use this to identify which items will fluctuate in future (income, wages, cost of supplies) and which will not change (rent, phone plans). For many items, the timing will be predictable and with other items you may have to make your best guess. As with a budget you can then build different scenarios for the future – best-case scenario, worst-case scenario and what-if scenarios.

Using the information in your Cash Flow Budget

A Cash Flow Budget is valuable to ensure sufficient cash is available for upcoming obligations and expenses and gives the ability to plan for the future. If there is a shortfall in cash, you can plan action – chase up debts, negotiate payment plans or put off a new purchase for a while. It will also allow you to start making some decisions over the longer term such as:

• Are you buying more supplies/stock than you are using?
• Are there seasons when you need to buy more/less stock or supplies?
• Do you need to reduce your customer payment terms so you get paid quicker?
• Can you offer your customers a quicker way to pay your bills such as “Pay Now” on your invoices?
• Would it be simpler to pay superannuation monthly so the amount does not build up, leaving you to scramble for the amount each quarter?
• Can you afford a new loan repayment?
• Should you hire more staff or reduce staff?
• Should you have a separate account to put aside GST, Superannuation and Tax?
• Can your bookkeeper help with customer payments or by sorting the bills into payment periods – now, next week, next month - so you know what is coming up?

Having a good understanding of your cash flow will minimise those unpleasant payment surprises and put you in charge so that you can make business decisions with more confidence.

This information is provided by Australian Bookkeepers Network Pty Ltd www.austbook.net