The Importance of Cash Flow Management

cash flow

By Rebecca Macdonald and Nathan Zhu

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It’s no secret that having good cash flow is integral in the success of your business, but just how well do you know when and where your cash is coming from or going to?

The Statistics

Recent research has highlighted that only 50.7% of small business had positive cash flow as at 30 June 2017. The overall trend has shown that more and more businesses are falling into negative cash flows.

An important fact to remember that just because a business is profitable, it doesn’t mean that it’s cash positive.

Areas to Consider

  • Seasonality of sales – here is where a lot of businesses have trouble. Many businesses income streams are connected with the seasons, and knowing which months of the year you will be cash lean is important as it gives you time to plan. This also is a big factor for businesses that run on contracts, understanding when the quieter months will be and planning accordingly. Cash inflow – this is all about knowing how quickly and efficiently you are converting sales into cash. Are you paying your suppliers faster than you can collect from your customers?
  • Cash outflow – knowing when your cash will be leaving you is just as important as knowing when it will be coming in. This helps identify which areas are a concern from a cash flow perspective.
  • Cash control – this is all about understanding how efficient you are using your cash. How much of your cash is being tied up in stock/work-in-progress. How are your procedures for collecting outstanding customer debt? How does your monthly cash inflow compare to your monthly cash outflow?
  • Debt – when you borrow money from the bank, you are essentially using funds you are receiving in the future to pay for expenses you incur now which restricts your cash flow in the future at the cost of interest. By improving your cash flow and effectively reducing the levels of your debt you can potentially save more money by reducing your interest costs.
  • Growth – having a healthy cash positive business, gives you the flexibility and capacity to grow your business.

Take Action

There’s a wide range of things that you can do to start improving your cash flow. Here’s some of the more important things to focus on.

  • Know your business – this may be the single most important lesson to consider. Getting to really know your business allows you to take control over the details that you may not realise. One of the simplest ways to do this is monthly management reporting. This gives you an insight on where the money is coming in from and where it’s going out.
  • Budget – budgeting your business is a great way of taking control of your expenses and setting targets for your sales. This is also good for isolating specific problem or opportunistic areas of your business.
  • Forecasts – this is a very effective tool when you are looking at growing your current business or looking to expand at another location. Getting a picture of the future of your business is a great way of seeing how you want your business to look years from now.

If it has been a while since have undertaken a cash flow health check on your business, or if you require assistance with establishing and monitoring cash flow, please do not hesitate to contact us.

Want to know more?

If you’d like more information on cash flow management, please contact Rebecca Macdonald, Business Advisory Director, for assistance.

An Important Message

While every effort has been made to provide valuable, useful information in this publication, this firm and any related suppliers or associated companies accept no responsibility or any form of liability from reliance upon or use of its contents.  Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only.



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