Cash flow

What you are about to read is some of the most important information you will ever receive about running your business. Why is it important? Because it’s all about the serious subject of managing your cash flow.

If you want to stay in business you need money coming through the door. It’s as basic as that.

All businesses need money — lots of it coming in regularly, just like those cursed bills. That day-to-day money for running the business is called working capital. Then there is debt capital, borrowed funds to be repaid to a bank. (And for the record, the money you put into your business is called equity capital or owner’s equity.)

Keeping track

Generally, to avoid a cash hiccup you have to know what is happening with:

• Operating expenses.
• Overheads.
• Stock levels.
• Debt collections.
• Your profits.

By doing a cash flow projection you can make sure that each month there will be sufficient funds to keep you and your bank happy. Failure to do this is a common cause of business collapse.

Hope for the best, plan for the worst

The starting point is to predict your sales and expenses. This is much harder for a new business as there is no history to look at for guidance.

Experts suggest you do a few cash and profit projections ranging from blue sky scenarios to projections from hell, where everything goes wrong. Then do a number of sensible average projections.

As these are guesses, odds are you will be wrong. But if you monitor the projections — month by month, say, or even week by week — you can make some running repairs. Remember, this exercise is crystal ball stuff but people who do it regularly do actually become good at knowing their business, including their customers and debtors. They are not only in control, they are less likely to go belly up.

What are you guessing?

Try working out estimates for these items to get an idea of cash flow:

• Cash in, or receipts (sales and other income).
• Expenses, including both permanent or fixed expenses, such as rent, and changeable or variable expenses, such as advertising and transports costs.
• Monthly loan repayments.
• Outlay on stock or raw materials.
• Stock levels.
• Remaining capital.
• Set-up costs.

Where do you start?

The starting point should be the brighter side of the whole show; that is, a sales revenue projection. Clearly, if you have drawn up a marketing plan to sell your products or services, then you already have it.

The next step is to knock up a list of estimated expenses. Ask yourself what you estimate the following to be:

• Kick-off costs for fitouts, purchase of the business, legal costs, and so on.
• Fixed costs, such as rent and wage.
• Variable costs, which include advertising, telephone, paper bills, and similar items.

These latter costs will go up and down with the success and failure of the business and have to be carefully monitored. Estimates in percentage terms can be worked out to help your projections as sales increase or decrease. For example, you might work out that your advertising bill is 2% of sales, so if sales jump from $1,000 a week to $2,000, your ad bill will, or should, go from $20 to $40.

Take some time to become an expert at cash flow. Your bank manager will love you for it!

Important information 
As this advice has been prepared without considering your objectives, financial situation or needs, you should, before acting on the advice, consider its appropriateness to your circumstances. All products mentioned on this web page are issued by the Commonwealth Bank of Australia; view our Financial Services Guide (PDF 59kb)