Cash flow management
Cash flow and accounting

Cash flow management

Cash flow is an important marker of the health of a business – it can affect whether you pay your bills on time, hire new employees, buy equipment, and so on. Unfortunately, small businesses in Australia are going through a long period of chronic cash flow stress, with 92% of surveyed small businesses reporting at least one month of negative cash flow in the financial year. Learning about cash flow management can help mitigate some of these challenges.

What is cash flow management, and why is it so important?

Cash flow is the movement of money into and out of your business - it's what you have left at the end of the day when you add up your income and your outgoing costs. It's not just about profit, but also how you use that money to grow your company.

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Cash flow management is an essential aspect of any business. It's particularly important for small companies, who may not have large reserves of capital to fall back on when they need them. A small business might not be able to afford to wait several months for payment from a customer or supplier. In some cases, this could mean bankruptcy for the company; in others, it could simply mean losing money on each transaction because your business doesn't have enough cash on hand to pay its bills as they come due.

Why is managing cash flow important to a small business?

Apart from bankruptcy and losing money, there are plenty of day-to-day reasons for small businesses and sole traders to invest appropriately in cash flow management.

Here's one example. You probably know you need enough cash to pay your bills and keep the business running. But what about having enough money to grow? If you think about it, growth is just another way of saying, "expand our client base." And if you want to expand your client base, getting more clients usually means spending money on marketing and other marketing-related expenses, which means knowing your cash flow position inside and out. 

Creating a budget for these activities is important, but so is making sure that there's some breathing room in the budget so that unexpected costs don't stop all expansion plans.

Here are some other reasons why small business owners and sole traders need to get clever with their cash flow:

  • Cash flow helps you make better decisions about inventory controls, employee hiring and equipment purchases.
  • Cash flow allows you to respond quickly to changing market conditions by adjusting spending levels or changing prices on products or services offered.
  • Cash flow allows you to keep an eye on expenses so that costs aren't out of line with revenue; this helps prevent overspending on things like advertising.
  • Cash flow gives you more options when unexpected expenses arise or when customers need refunds or credit notes from your company — which means you're less likely to get caught short if something goes wrong in your business operations.

How to manage cash flow as a small business or sole trader

Managing cash flow is made up of three steps: tracking, planning and forecasting. 

Cash flow tracking is essentially making a budget over a period of time. It's often measured by looking at your accounts on a monthly or quarterly basis, but it can also be calculated on a weekly or even daily basis if you have enough data.

Cash flow forecasting starts with identifying all the sources of income for your business – these are known as 'receivables'. For example:

  • Sales invoices that have been issued but not yet paid (or settled) by customers
  • Payments received from customers before they've purchased goods or services (if this applies)
  • Other payments received before the work has been completed

Cash flow planning means making sure you have enough money coming in, ensuring that none of your money goes out unnecessarily, and planning ahead for all foreseeable expenses. 

How to manage cash flow in construction

When it comes to cash flow, businesses in construction face unique challenges. When you purchase materials, you might have to pay for them in advance or pay for them along with labour at the end of the job. If you pay in advance for materials, you could be stuck with inventory if something goes wrong and you don't get paid for your work. Suppose you don't pay for materials until after the job is completed. In that case, there is a chance that you won't get paid for all the work done on the project if something goes wrong and it becomes necessary to remove materials from the site before the customer pays for them.

Managing cash flow in construction means ensuring that money comes in before bills are due. Here are three ways to do so:

  • Keep track of your expenses. You can't know how much money you have if you don't keep track of all your expenses, including wages, fuel costs, supplies and equipment rentals. It's also important to keep track of revenue from each job so that you know how much money is coming in before paying bills.
  • Be sure contractors get paid on time. If subcontractors or suppliers don't get paid on time, they may not deliver materials or services when promised — which delays progress on your project and costs you more money in the long run. 
  • Look into invoice finance. With invoices taking potentially months to be paid by your contractees, you may want to partner with a company that will lend you the money tied up in your unpaid invoices. When your invoices are eventually paid, that money pays back the loan. Essentially, you can access the funds in your unpaid invoices instantly. While some interest and fees are involved, you can save big bucks in the long run by having sustainable cash flow and instant access to working capital.

How to manage cash flow in retail

Here are some tips for managing cash flow in retail:

  • Know when you'll get paid by customers. If you sell products on credit — especially big-ticket items like furniture or appliances — then make sure you know when customers will pay you. If they're not paying on time, you may have to dip into your own pocket to keep things running smoothly.
  • Keep track of what bills are due each month. This may include rent and utility payments, inventory purchases, and payroll taxes. Ensure that your business budget includes enough money to cover these expenses so that they never become late payments or cause a cash crunch at an inconvenient time.
  • Don't overspend on inventory unless it's essential to keep the store stocked with inventory at all times or if sales are slow due to bad weather or other factors beyond your control (such as a recession). Don't build up too much inventory if demand isn't there; sell off old stock instead of letting it sit around collecting dust

Disclaimer: always refer to professional advice. The information presented here is purely indicative and not intended as advice. Always consult a legal or finance professional.

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