What is cash flow and how is it measured, monitored and managed?

Definition:

Cash Flow; A measure of your business’ financial health. Cash Flow equals cash receipts minus cash payments over time.

Cash flow management is critical to your business to ensure you have enough money to pay your bills. These bills include day-to-day running expenses and large sums predicted and planned for in your annual budget.

In cash flow management, timing is everything. You must have money available to pay the bills when they come in. If you run out of cash you can’t pay your bills on time – you may end up in financial difficulty. This could be just paying the power bill late or as serious as not being to pay your employees, if you are not in control of your cash flow minor problems can become major problems and could even be the end of your business.

Part 1. How is it measured?

Cash flow measurement can be with a simple cash flow budget that lays out what you have to pay each month and what you will receive each month – extend this out for a year. For example; in one month of the year you may have to pay Quarterly BAS + insurance for the year + annual loan repayment + interest + vehicle registration + usual monthly bills all in one month. You need to know when this is going to happen and have the cash available.

Making a cash flow budget is not difficult once you’ve got the figures, but the hard part is to get accurate figures. A good to start is with previous budgets, or cash-flow forecasts to see if they show any clear seasonal patterns of income and expenditure. If you are starting from scratch you will have to go through all your cash receipts, bills and payments and list them in the month that they were received and paid to create an historical record. You can do this with a pencil and paper but an electronic spreadsheet is a very useful tool.

Without an accurate cash flow budget/forecast you cannot fully monitor and then manage your situation.

Part 2. How is it monitored?

Now that you have your cash flow budget you need to make sure that it is going to predict high cash demands correctly so you are not caught short. Your cash flow budget is a working document – it is very important that actual figures are entered regularly and adjustments made as necessary (a spreadsheet is particularly useful for this). For example; just when you think you have the cash to pay the rent at the end of the month, the big fridge ‘blows up’ and you have to pay for urgent repairs immediately – this is the time to make adjustments and plan how you are going to get by until the insurance claim is paid.

5 Keys to Monitoring Your Cash Flow

1. Do a cash flow budget

2. Enter the actual cash flow frequently – weekly is recommended

3. Have double authorisation for payments so you know what is going out

4. Check your bank account balance against your forecast at least monthly – preferably weekly

5. Review your budget until is accurately predicts your bank balance.

Monitoring your cash flow can have positive results as well. For example; things are going along OK but you notice that some bills were less than expected and business has been better than expected, this leaves you with extra cash in the bank. After double checking your forecast, you could use this extra cash to bring forward some payments to take advantage of early payment discounts, buy some stock on special to reduce average cost of goods or place the surplus cash in an interest bearing account until needed.

Your Jim’s Professional Bookkeeper will be able to help you with this. NOTE: Do not buy a new major piece of equipment or take that world cruise just yet… remember cash does not equal profit (more on that later). Monitoring your cash flow is the key to managing your cash flow.

Part 3. How is it managed?

You may think that having strong positive cash flow would be easy to manage and you would be right – but manage it you must.

5 Things to do if you have more cash than expected: -

1. Double check your cash flow budget, maybe you have missed a payment

2. Take advantage of early payment discounts

3. Reduce high interest loans E.g. credit cards

4. Use interest bearing deposits

5. If you have a mortgage off-set account that you can park this extra cash in and get it back without costs then you can earn tax free income by reducing your mortgage interest. This one is a special, but make sure that your business setup allows this and document the actions.

Tight cash flow is a common problem but there are ways to manage this and catch up if you are behind with creditors.

5 Things you can do if you have cash flow problems: -

1. Collect outstanding cash of your own – try not to be part of someone else’s cash flow management program.

2. Use 30 day supplier accounts to the max

3. Talk to outstanding creditors and make a payment arrangement; E.g. promise to pay new invoices within their terms and $xx off old invoices each month. Suppliers are less likely to cut you off if you are making an effort to clear the debt. NOTE – you must honour your promise so make sure you can. (I have had good success with this strategy)

4. Freeze all non essential purchases and payments.

5. Your Bookkeeper can request a payment plan from the Australian Tax Office to even out BAS and PAYG payments. Still has to be paid but gives you extra time.

There are many more things that can be done to get your cash position into positive territory – your Jim’s Professional Bookkeeper can make this much less stressful for you.

This is where your Jim’s Professional Bookkeeper can help you sort out your cash flow. There is a very useful workbook valued at $57 to help your business thrive, it is full of practical tips and suggestions that you can start using from day one. To get your FREE copy go to http://www.helpmybusinessthrive.com today.

(Contributing author, Dai Reynolds Jim’s Bookkeeping-Brisbane Western Suburbs. Dai is a Master of Business Administration graduate of the University of New England, Registered BAS Agent and fellow of the Institute of Chartered Bookkeepers. For 16 years he owned, operated and managed businesses in the tourism and hospitality industry – particularly accommodation, event management and food & beverage management. In recent years Dai has worked in the not for profit sector, motor sports and motor trades industry and business services, in finance, administration and practice management roles, before becoming a Professional Bookkeeper in 2009.)

Tags: bookkeeper, bookkeeping services, cashflow, small business

This entry was posted on Tuesday, July 27th, 2010 at 1:46 am and is filed under Bookkeeping, Brisbane, Home Based Business, Uncategorized, small business. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.