Business Cash Flow FAQ’s
Business Cash Flow
The very best way to improve cash flow is to have a clear understanding of what impacts it the most. The key ‘levers’ of cash flow are Sales, Costs & Overheads, Pricing, Customer Payments, Suppliers Payments, Inventory, Jobs in progress, taxes and interest.
You then need to put in place a process for proactively managing these ‘levers’. Each one needs a project of its own and someone in charge of it to ensure it happens and they are accountable.
Your Cash Flow Forecast is your ‘bible’ for improving cash flow. It’s the proof in black and white on how things are progressing.
CFOs know how cash moves through a business and how to speed it up or slow it down to suit the situation. They are totally dedicated to proactive focus on managing cash in a business, to ensure it doesn’t run out and there is enough to handle growth without the headaches.
CFOs are great at facilitating discussions with suppliers, lenders, investors, landlords etc. to negotiate the best possible terms for the business, to maximise cash flow effectiveness.
They are also very adept at seeing cash flow improvement opportunities quickly. Due to their decades of experience… they know what to look for to quickly free up cash in any business.
Usually it’s done on a monthly basis i.e. you note the opening bank balance at the start of the month, plus cash coming in, less cash going out and the resulting bank balance at the end of the month. You can do it for as many months as you like and you will be able to see what should be your bank balance well into the future. Many people do the forecast on a spreadsheet or there are many apps you can use.
Once you’ve put it together, it doesn’t end there! You can work with the numbers to fix any issues, such as a negative balance, if you don’t have an overdraft in place. You can speed up payments from customers, slow down payments to suppliers, inject some of your own funds or borrow externally etc.
The best way to manage daily cashflow is to run a daily cash flow forecast. As per the answer to FAQ re ‘What information is required to prepare a cash flow forecast?’ Use this report on a daily basis.
When a business is in severe cash flow stress, this is a very useful tool. It enables you to manage the situation on a daily basis. You can see when you are able to pay people based on the daily balance. It shows where you need to speed up funds coming into the business e.g. chase customers for payment or inject funds from shareholders or outside lenders/investors.
Proactive focus on cash flow is advantageous because it eliminates the constant worry of struggling to pay bills on time and being hassled by supplies, landlords, bankers etc.
By understanding how cash flows into and out of the business and at what rate, you are able to then manage the situation, rather than being a victim of it.
It’s not ‘rocket science’ you just need to focus some proactive attention on it. If you want to grow your business, you absolutely must have good cash flow management in place to succeed.
Cash flow means the flow of cash in and out of a business. It takes into account the timing of cash coming into the business from various sources e.g. sales, loans, tax refunds, interest etc. It also accounts for cash going out of the business e.g. expenses, taxes, dividends, asset purchases etc. The timing of cash movements is different to that of profit and loss. You measure costs against sales when they are made… not when you get paid for them, if you offer terms to your customers. This is where lots of businesses get into trouble. They are making plenty of sales, but they aren’t getting paid quickly enough. On top of that they are paying suppliers, staff, landlords etc. and then end up with cash flow squeeze.
You need to know:
- The correct opening bank balance. This isn’t just the balance that’s on your bank statement, but the reconciled balance, which takes into account any unpresented transactions, such as transfers in and out that haven’t hit your bank account yet.
- Funds coming in
- How much is owed to you by customers that you give terms to pay. You will need to factor in a timeframe for these to be paid.
- Future expected
- Sales and what is the expected time customers will take to pay.
- Loan funds and interest
- Tax refunds/grants/subsidies
- Shareholder/Investor funds
- Sale of assets
- Funds going out
- How much you owe suppliers that give you terms to pay. You will need to factor in a timeframe for paying these.
- Future expected
- Expenses e.g. rent, wages, advertising etc.
- Cost e.g. goods to sell, labour and materials on jobs
- Taxes due
- Loan repayments and interest payments
- Capital expenditure e.g. equipment
As explained in the question above, cash moves into and out of the business at various times. A Cash Flow Forecast is a report that lays out when cash will come into and out of the business.
Effectively you are forecasting what will be your bank balance at any given time in the future. It helps you to see the ‘peaks and troughs’ in your cash position, so you can fix the troughs before they occur.
The biggest benefit of cash flow management is that it provides confidence for business owners and management that the business is sustainable. Many people believe that if they just sell enough… cash flow will take care of itself. This is a dangerous myth! Cash is required to fund sales i.e. to pay for products to sell before you’ve been paid by customers and to pay for expenses such as wages, rents etc. If it’s the case that you need cash to fund sales… the more sales you make, the more cash you need. If this isn’t taken into consideration when a business begins to grow, cash flow squeeze is the result. Growth can actually be the cash flow downfall of a profitable business!
Cash flow is the term used to describe the activity of cash moving in and out of the business. For example cash coming in from sales, loans, interest etc. and cash going out e.g. expenses, taxes, dividends etc.
Cash Flow Forecast is a report that shows the movement of cash into and out of the business, as well as the opening and closing bank balance each day, week, month etc. The Cash Flow Forecast is probably the most important financial management tool in any business. It sets out clearly where the cash flow issues will be in the future, which provides an opportunity to deal with it well in advance.
Cash flow management is the most important aspect of the financial health of a business. Running out of cash is probably the single biggest contributor to business failure. Many businesses can be profitable, but if they don’t focus on the issues affecting cash flow, they are headed for constant headaches and business failure.
Not being able to pay your bills on time is the biggest problem for many business owners. It creates anxiety, poor staff morale and limits the ability of the business to grow and prosper.
We now have the useful financial information we need to make informed financial and business decisions at the right time. His input has led to a 27% improvement in profitability.
Greg Jacques, General Manager
My CFO On-Call Michael came in and implemented a range of new systems and reports that we still use today. I now have a P&L which I can read and actually understand! Michael’s great at putting things into layman’s terms and helping us make sense of complex concepts. And his value doesn’t just stop at numbers – due to his commercial background he has also been a great asset to us in terms of recruitment and managing staff.
Jenny March, Owner
Before engaging CFO On-Call, the bank wouldn’t support me, so debtor financing was my only option. CFO On-Call set up our new management reporting and forecasting, and the bank changed their mind. Since then, we have grown total revenue by 17%, increased gross margins from 17% to 37% and improved debtor days by 36%. We’re going from strength to strength!
Peter Deverall, CEO
Safa Glass, Brisbane