A Guide to Cash Flow Management

Dollarphotoclub_45635697Cash flow is the amount of money that comes in and out of a business over a given period of time. While ideally there will always be more cash coming in than is going out, there will inevitably be times when this is not the case and that is why managing cash flow is so important for a business.

This article looks at how to create a cash flow forecast and some of the ways you can manage your cash flow better to ensure the long term health of your business.

How to forecast cash flow

A cash flow forecast is a document that shows the amount of cash a business expects to receive through payments for goods or services and the amount it expects to pay out on monies owed. It is usually a snapshot of a specific period, ideally a week or a month.

The steps involved in creating a cash flow forecast are as follows:

  • Add in your current bank balance – this is the cash that you have on hand.
  • Add any cash owed to you that you expect to receive during the period – ideally this should be based on factors such as your payment terms and the payment habits of particular customers.
  • Add in the amount that you expect to earn in sales over the period – this will obviously be an estimate, but it can be made more accurate by referring to sales figures from previous periods.
  • Add in all your expected outlays over the period – these will include known expenses such as rent, inventory, wages, debt payments, GST, PAYG instalments, PAYG withholding amounts, fringe benefits tax, superannuation, utilities, office supplies, advertising costs and vehicle and equipment maintenance and running costs.
  • Consider and include any variables that may affect your final figure, such as a new product line you are introducing that may increase your sales, or the emergence of a new competitor who may take some of your market share during the period in question.
  • Compare the total expected outgoings with total expected income and you will either be left with a surplus or a deficit.

It is important to revisit previous cash flow forecasts periodically in order to compare projections with actual outcomes. This will allow you to fine tune your future estimates up or down, depending on how accurate they were in the past. If your current cash flow forecast produces a deficit, then you need to look at ways of managing your cash flow more efficiently.

How to manage your cash flow

It is not the end of the world if your cash flow forecast predicts a loss for the coming month. It is actually a good thing in a way, because you have managed to foresee it early and you can now take measures to reverse that outcome in the future.

There are a number of ways to manage your cash flow so that it has a better chance of remaining in surplus each month. One thing you can do to make your cash flow more consistent is to make your accounts receivables more efficient. Ways to do this include:

  • Having clearly understood payment terms, with penalties for late payment,so that debtors are more likely to pay on time, thus allowing you to be more accurate in your cash flow predictions.
  • Invoicing promptly and preferably by email, so that there is always a clear record of the invoice being sent.
  • Making payment easier for customers, such as offering online credit card payment.
  • Encouraging regular clients to pay by direct debit, which will then guarantee you are paid on time each month.
  • Offering discounts to encourage clients to consistently pay on time.
  • Following up promptly on slow paying customers and referring defaulters over to a collection agency.

Other things you can do to manage your cash flow more efficiently include using the latest technology such as accounting software or a cloud based service to ensure greater accuracy of your cash flow entries.

You can also take full advantage of creditor payment terms, paying via electronic funds transfer on the last due day in order to retain your funds for longer. You could also negotiate longer payment terms with your creditors, particularly if you are a long-standing customer.

In essence, cash flow management is about delaying your outlays for as long as possible and speeding up the arrival of your incoming cash. Sometimes however, the unexpected will happen and you will find yourself looking at a shortfall. Fortunately, there are several things you can do beforehand to make sure you survive such a temporary lack of cash. These include:

  • Developing a good relationship with your bank and keeping them regularly informed of your financial situation, so that if you do need some quick help, they will be more likely to give it.
  • Establishing a line of credit with your bank so that there is always money to call on if you need it.
  • Developing good relationships with your suppliers, so they will be more flexible if you find yourself needing more time to pay.

Cash flow is the lifeblood of your business and cash flow forecasts are just as important as your business plan or your mission statement. They need to be done regularly and accurately to allow you to see in an instant how your business is travelling and what adjustments you need to make to ensure your cash flow continues and grows along with your business.

Jarrod Kagan
Having practised at a major law firm before moving across to Probe Group (one of Australia’s most prominent credit management organisations), Jarrod has over 8 years’ experience in credit management and debt recovery. He now holds the position of Head of Business and Compliance and as a qualified Lawyer, his skill level and experience covers the technical aspects of credit management and debt recovery, including: best practice, compliance, legislation, strategic analysis and industry specific detail.