Managing your cashflow print Print

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Managing your cashflow efficiently is a key business skill. This guide explains the principles of cashflow management and shows how businesses that neglect this task can get into difficulties

What is cashflow?


Cashflow is the lifeblood of any business, and the aim of all business people is to increase positive cashflow, so that more money is coming in than going out. Cashflow refers to the daily ebb and flow of money in and out of your business. Money comes in from sales, and money is paid out to meet bills and commitments. The difference between what you get in and what you pay out is the cash surplus (or shortfall) you have (or will need to find) to keep your business afloat: to pay rent, wages, replenish stock, etc.


Purpose of the cashflow forecast

Cashflow management is all about time: the timing of money coming in and money going out.

Do you have cashflow problems? Test yourself

  • Do you ever fall into overdraft by mistake and have to arrange a quick meeting with an ANZ Business Specialist?
  • Have you struggled to meet business overheads and wages during seasonal downturns?
  • Have you traded too strongly and had to ask for special funding arrangements to meet your commitments?
  • Have you ever had to ask for an overdraft to pay an unexpected tax bill?

These challenges all signal the need for good cashflow management skills.

The purpose of cashflow forecasting is to manage the gap between when the money comes in (if you have credit sales this could be one to two months - or even longer - after you've done the work) and when your bills are due. This is where the skill comes in. Your objective is to practise proactive rather than reactive management, in other words to anticipate cashflow challenges well in advance so that you can take timely steps to manage the situation.


Elements of the cashflow forecast

The cashflow forecast is essentially a table or spreadsheet that allows you to project ahead the cash receipts into your business and the cash payments out of your business. The ANZ Business Planning CD provides a sample cashflow forecast table. The key parts are:

  • Income (cash inflow): This includes all the cash you think you'll get in any particular month. In addition to forecasting actual cash sales, you also have to take into account credit sales and estimate in which month you'll actually receive this. Remember, the cashflow forecast deals only with the cash you'll actually receive during each month. You're essentially trying to predict what your bank statement will look like each month. Note that under incoming cash you should also record loans received, funds introduced into the business by the owner or shareholders, and any wage subsidies received from Work and Income.
  • Expenses (cash outflow): This includes all the monthly expenses that drain actual cash out during that month. Again you're trying to get as close as possible to what the bank statement will look like. You should include drawings, GST and tax payments, any purchases of fixed assets, etc.
  • Surplus/deficit:  In this section the spreadsheet will automatically subtract cash in from cash out to give you your surplus or deficit cashflow. Once you enter your opening bank balance for the first month (the balance at the start of that month) it will then show you what your closing bank balance will be.

So where do you get the figures from?

  • If you have an established business then you can use last year's figures as a basis for this year's estimates (with any necessary adjustments for inflation/deflation or sales growth).
  • If you don't have at least 12 months trading behind you, then you'll need to estimate some of the figures. Ask your accountant for advice here. For example, most accountants will be able to help you estimate business overheads based on their experience with many other businesses.


Forecasting tips

  • You're defeating the purpose of a cashflow forecast if your figures are optimistic. It is better to be realistic and conservative, especially in your estimates of sales revenue.
  • Your accountant will often be able to spot items that you may have missed. For example, don't forget to include provisional tax and other tax payments. In a well managed business there should be no such thing as a tax shock.
  • Use GST inclusive figures in your cashflow forecast, and include GST payments in your Expenses (cash outflow) section.
  • If seasonality is an issue for your business then the cashflow forecast should also prompt and encourage you to put aside reserves to pay for wages, office overheads and other running expenses during the lean months.

What are the benefits?

Benefits of cashflow forecasting include:

  • A reduction in stress and pressure. The ability to spot trends and anticipate a cashflow crunch. The sooner you can anticipate a tight cashflow period the more time you have available to take contingency action. For example:
  • Asking for an extended overdraft over the tight period.
  • Speaking to suppliers about extended lines of credit.

Having a sale to raise cash from slow moving stock.


The main cashflow pitfalls

Poor management of the Big Three

The Big Three in cashflow management are your creditors (people you owe money to), your debtors (people who owe you money) and stock (which is often defined as 'money in chains'). Effectively managing these three will significantly improve your cashflow.

Forgetting about taxes

It's easy to forget about your taxes. Speak to your accountant about your forthcoming tax liabilities and factor these into your forecasts.

Drawing too much out of the business

Be careful of draining too much money out of your business in the form of personal drawings, particularly during the leaner cashflow months.

Committing to purchases at inappropriate times

It's easy to place unnecessary stress on your cashflow by purchasing items at the wrong time in your cashflow cycle. For example, committing to capital item purchases during lean cashflow months. In some cases, the business might be better off leasing rather than purchasing outright.

Under-trading and over-trading

Under-trading is relatively easy to understand: it means not doing enough business to cover your costs and make a profit. But a number of business people aren't aware that over-trading can also lead to a business collapse. 'You mean I could go under from doing too much business?' people ask. Yes, it happens quite frequently, because the business becomes overstretched and simply does not have the resources to fund the increased sales. For example, suppose you sell $20,000 worth of stock for $40,000 - but don't get paid for 60 days. You have to re-order the $20,000 stock to keep in business. Not having this money available is in itself an indication of poor cashflow management because you still have to pay rent, wages, etc., during the waiting period. If you can't meet your obligations, then someone you owe money to could force you into receivership - even though you've just had sales of $40,000! So it's perfectly possible for a profitable business to fail if it grows faster than its capacity to generate cash.


Managing your cash

The essence of cash management in a growing business is to understand your cash cycle. This differs from business to business. For example, if you operate a retail cash-only business (such as a hairdressing salon) then your cash cycle is basically one day. However, if you are a builder or a quantity surveyor, your cash cycle likely to be much longer - it may take months for you to get paid for the work you do. If through your cashflow forecasting you can see that there are going to be obvious gaps then there are three actions you can take:

  • Try to change (shorten) your cash cycle by getting money in sooner.
  • Speak to your Business Banking Manager about possible bridging finance.

Your strategy might include both tactics. Remember that in a growing business it's your responsibility to keep on top of the figures until you've reached the stage where you can employ an accountant or financial officer to monitor the cash cycle.



Negotiate from strength

In spite of your best efforts to plan your cashflow rhythms efficiently, you'd be very lucky not to experience a cashflow crisis at some stage or other. Most growing businesses experience some degree of cashflow difficulties as part of their growth - in fact it's almost part of growing up as a business. What distinguishes competent business people is their ability to predict such events because their fingers are firmly on the pulse of their businesses. If you manage your cashflow well there may be times when surplus cash can be placed into interest earning deposit accounts - talk to your Business Banking Manager about the options available.


Further information:

To talk to an ANZ Business Specialist:
Call 0800 269 249
Visit your nearest ANZ branch


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