Managing cash flow

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We all know cash flow is important. But as business owners we tend to focus on other things - sales, expenses and profitability. Often, we only pay attention to cash flow when something goes wrong – and by then it may be too late.
 

The cash flow cycle

Every dollar you invest goes through the cash flow cycle before it comes back to you, bringing some profit with it. The faster the cycle turns, the more successful your business will be.

 

Let’s say you buy $100,000 worth of stock and sell it at a 40% profit. When the account is paid, you receive $140,000 in cash. Then you have a choice:

• Reinvest the full $140,000 in your business and make another 40% on that. The more often you can do that, the more profit you can make.
• Keep the same $100,000 investment cycling around your business and use the profit for other purposes. The faster the cycle turns, the less money you need to plough into your business.

 

A slowing cash flow cycle means you need to find extra cash to keep your business running. If sales falter, accounts receivable blow out or production slows, you may need to dip into your reserves or borrow. And that comes at a cost.

           

Cash flow warning signs

You could be having cash flow problems if:

• Your suppliers regularly go unpaid for more than 60 days
• You have frequent disputes with suppliers or change suppliers regularly
• You often lodge BASs late
• Employee super payments are significantly in arrears
• Suppliers insist on cash-on-delivery

 

Keep your cash flow flowing

The reasons cash flow stops flowing usually fit into one of five key problems. The ideas and solutions below provide solutions to the top five problems, so that you can manage your business cash flow better.

 

Top five cash flow problems	Solutions
1. Failing to plan for market volatility and changing conditions	Monitor your environment. Tools like our Business Sales Indictor can help you predict a slowing sales trend Be prepared for the effects of higher costs (this could impact your stock, salaries or other areas of your business) Consider using risk management tools to reduce your exposure to changing interest rates, commodity prices and exchange rates, and use business risk insurance to protect your assets and your income Use an online tool like NetBank or CommBiz to stay on top of your cash flow position by seeing your transactions in one location
2. Tying up capital in stock and equipment	Turn over excess stock, even at a discount Consider using leasing solutions for equipment, instead of tying up cash
3. Buying long-term assets out of current cash flow	Use longer-term lending solutions for capital assets Match the length of the loan to the life of the asset
4. Collecting accounts receivable too slowly	Monitor accounts receivable carefully Have a system in place to follow up overdue accounts Use electronic payment solutions to put cash in your bank account faster
5. Failing to put excess cash to work	Look for cash reserves in your business, such as cash you’ve set aside for stock or GST that can be put to work Earn extra profits for your business using the right investment product for the length that you can invest  (eg Business Online Saver for short term and a Term Deposit for long term)

 

More cash flow tips

1. A  Business Review with one of our Business Bankers can help identify areas to improve in your business
2. Download the The big picture on cash flow booklet for more details
3. Consolidating your banking can help. Time wasted shuffling funds between banks can be a big brake on your business.

 

 

 

• 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).