The survival of a small business is reliant on having enough cash flow to cover additional expenses and prepare for unforeseen events. Many businesses struggle every month, between the time they invoice customers and the time they are paid, and a shortfall of funds can cripple expansion plans or even break a business.
Without sufficient cash flow, a business is operating in a risky fashion regardless of profit margins. The difficulties are also increased when outside forces play their inevitable role, such as occurs during economic volatility, times of low consumer confidence, or a high Australian dollar. Many thousands of businesses become insolvent every year, and while it’s expected that not everyone will be a success, good money management could help to save those who may otherwise be tottering on the edge of insolvency.
Cash flow is an important business fundamental, especially for small businesses which record a statistical closure-rate which greatly outstrips their larger counterparts. Every business should invest time and money in a responsible cash-flow forecast. It’s a tool that will enable small business owners to keep updated regarding available cash, while planning for times when earnings are less than expenses. A cash-flow forecast will also provide insight regarding the right time to expand and the right time to tighten the budget. A cash-flow budget consists of several categories.
- Day-to-day operations such as income, employee payments, and expenses
- Investments and purchases
- Finances including repayments and loans
At a set time every month, a business owner should take the time to review the monthly balance sheet including profit and loss statements. It’s also important every week to review the accounts receivable and payable, cash-flow forecast and outstanding purchase orders. For ease of reference it’s handy to compile these figures on a basic Excel spreadsheet layout as described below.
- Enter the cash you have on hand to cover expenses for the upcoming forecast period.
- Add expected incoming cash-flows for the period, including sales and customer payments, earnings from interest, grants and dividends. These inflows will be affected by customer payment methods. Guaranteed cash sales can be entered straight away, while credit sales can be entered on the spreadsheet for the expected pay date. Considerations will include the payment history of customers and observations regarding the economic outlook. If possible you can schedule incoming payments to align with outgoing expenses.
- Add your expected outgoing cash-flows, including payments to suppliers, repayments for loans and credit cards, and taxes. Take Business Activity Statements (BAS) into consideration, which should be submitted on time to avoid penalties. Also take irregular payments into account, such as maintenance and repairs.
A solid cash-flow forecast will go a long way toward the business avoiding unwelcome financial surprises. By strictly adhering to cash-flow guidelines, liquidity problems can be forecast, providing the time to work out solutions regarding any financial shortfall. Having advance knowledge of a cash surplus will also provide opportunity to invest in the business, ensuring continued growth and success.