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Cash Flow Management

What is Cash Flow

Cash flow is the movement of money into and out of your business that determines your business’ solvency. Budgeting for future cash flow will help you to understand whether you will have enough funds in the business to pay creditors.

Cash is the lifeblood of a small business. A business can sustain itself for a short time without sales or profits, but without cash it will die.

Cashflow is essential in ensuring a business survives and prospers, and is the primary indicator of business health. For this reason the inflow and outflow of cash need careful monitoring and management.

Understanding and practising the key elements of cash flow and cash flow management will help protect the financial security of your business.

How to improve cash flow

There are steps you can take when dealing with your customers, suppliers and stakeholders to improve cash flow and avoid common problems:

  • Know your income and expenditure, and tax and employee financial obligations
  • Research asset purchases extensively and plan for major purchases
  • Use the practice of forecasting to anticipate and plan for highs and lows in your business’ lifecycle, and keep that budget up-to-date
  • Identify cash flow problems before they build up by closely monitoring the payment habits of customers and your own supply management
  • Work on good relationships with your banker, accountant, and customers
  • Improve your operating systems for improved production efficiencies and controlled financial systems

Working on improving your cashflow is worth the investment of your focus, time and resources. Get advice from your financial advisors, and follow through on tried and trusted methods of financial control that will support your needs throughout your business lifecycle.

Here are some suggestions to help you improve your cash flow.

  • Draw up a cash flow forecast and discuss this with your accountant and bank manager to see if a plan can be worked out to improve your cash flow (To help you with this, use the Annual cash flow forecast fact sheet on this website).
  • Review all your business expenses and see if there is any possibility of reducing these costs temporarily. For example, look at vehicle use, mobile phone costs, stationery, contractors.
  • Check your prices. Make sure that you are charging correctly. If necessary, re-cost so that there is a proper margin put on to the costs of a particular product. Some businesses record ever increasing sales figures and yet their cash situation is critical from month to month. It’s possible there is not enough profit built into the products and the sales are only covering the costs of getting the product out.
  • Minimise your stockholding. Carry out an immediate stocktake including raw materials and packaging and identify which stock is readily saleable and which is out of date. The more stock you have sitting around, the more cash is being lost because that stock could have been converted into cash. You will need a certain level of stock to satisfy customers and to also ensure that you generate good sales. However, only hold sufficient stock to keep the business and the customers happy.
  • Review your immediate sales program to decide your real sales potential within the next month, three months or six months.
  • Get cash first and give credit last. Don’t extend credit to anyone unless necessary. A cash business is ideal, even if you have to give a discount to get that money into the till.
  • Get your invoices out quickly so that your debtors can pay them by the due date. Make sure this side of the business is efficient. If you have made sales and they need to be charged or invoiced out, then this area of the business is obviously very important. These are minor matters, but it is the small things in business that can cause the biggest problems.
  • Prepare a list of your debtors (that is, people who owe you money) and carry out urgent action to collect. If payment is still not forthcoming, then follow this up with a demand in writing. If payment is still not made, consider the services of debt collectors if debtors do not respond to your reminders. The fact that this could affect their credit rating usually moves debtors to pay to maintain their good business name. It is better to lose the business of a bad debtor than to continually spend time and resources chasing money owed to you.
  • Prepare a list of your creditors (that is, firms to whom you owe money) and make arrangements (if possible) to get extended credit on money you owe. Instead of getting 30 day terms, see if that can be extended to 60 or 90 days. Remember, this is interest free money and having the extra time gives you the ability to collect all your money before you have to pay your bills.
  • Investigate leasing assets instead of buying them. Instead of paying cash for vehicles or equipment, look at leasing them. Even though leasing may cost you a little bit in interest, it can improve your cash flow and allow you to put that cash to better use.
  • List any assets such as plant and equipment that are not in use and that can perhaps be sold for cash.
  • Check your present overdraft accommodation. If you are over the limit, talk to your bank to see what can be done about it.
  • Do not over commit as far as loans are concerned, because their servicing can greatly affect your cash situation.
  • Make sure you plan well ahead of any capital expenditure because this outlay will not bring in a quick cash return.
  • Always carry a cash reserve under which you will not make any more payments until the liquidity situation is improved. This applies mainly to your working capital requirements.

For more information see the Cash Flow Management business guide.

Get your cashflow back on track

Cash Flow Statements & Forecasts

A cash flow statement is a summary of money coming into and going out of the business for a set time period.  It is prepared regularly (monthly and at the end of the financial year) to show where cash is coming from and what it is spent on.  A cash flow forecast is essential for financial survival.  (Cash flow has often been described as the oxygen of business finance.) It will also show you when more cash will leave the business than come in.

SmartCompany: Free news and advice for small and medium businesses.


Tasmania Department of Economic Development, Tourism and the Arts. 2009. Financing Your Business. Retrieved July 16th, 20009 from http://www.development.tas.gov.au/business/starting_a_business/financing_your_business/how_do_i_manage_cash_flow

Queensland Government. 2009. Control your cash flow. Retrieved July 16th, 20009 from  http://www.business.qld.gov.au/virtual/topics/pageSurround_OSB.cfm?displayID=18110

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