2 minutes read

For those employing people, cash flow can be a constant headache… but it doesn’t have to be this way.

The best way to handle cash flow is to be proactive and manage it, rather than being knocked around by it.

It begins with understanding what cash flow is, what impacts cash flow and how can you make cash flow better.

 

What is cash flow?

Cash flow is the movement of cash in and out of a business.  It’s quite different from profit measuring, which measures when sales are made (not necessarily paid for) and when costs are incurred (not necessarily paid for).

It’s important to understand the difference between profit and cash flow, because it may be that a business is profitable, but can easily have cash flow issues if customers aren’t paying quickly enough and suppliers are demanding to be paid.

 

What impacts cash flow?

Cash flow is impacted by:

  • How much you sell and how quickly customers pay you for it.
  • How much you buy and how quickly you have to pay for it.g. what terms you get from suppliers, how often you pay wages and how often you pay taxes etc.
  • How much stock you hold and how long you’ve held it for (think of stock as dollars piled up on the stock room floor!)
  • How many jobs/projects you’ve got on the go where you’ve had to pay for labour and materials but haven’t been paid by customers yet.(think of jobs/projects as dollars piled up on the workroom floor!)
  • How much money you the business owner has injected from your own pocket.
  • How much money you’ve borrowed.
  • How much you spend on equipment, vehicles etc.

 

What can you change to make your cash flow better?

  • Get your customers to pay as quickly as possible… preferably up front or deposit and progress payments.
  • Negotiate the longest possible terms with suppliers and tax agencies.
  • Minimise stock holdings – have a really good understanding of your stock movements and requirements to ensure it sits on the shelf as little time as possible.
  • Speed up finishing jobs, so you can invoice them and get deposits and progress payments if possible.
  • Inject your own money into the business if you have it (particularly in these low interest times).It could be the best ROI available to you.
  • Borrow on the best possible terms and present the best proposition to lenders, to ensure you get the funds you need… and don’t be bullied into poor rates and terms.If you’ve got a good proposition you can shop around.
  • Caution when buying equipment.It may seem like a good idea to pay cash for it today… but in six months time when you’re overloaded with expenses and tax bills, you might regret it.  Better to spread the outlay over a longer period and smooth out cash flow.

 

By Sue Hirst Co-Founder CFO On-Call

Sue was managing an accounting practice when she co-founded the business in 1991. She has expertise in financial management, product and service development and human resource management.

Sue is passionate about explaining accounting concepts in clear English so business owners can make sense of their own numbers.