Plain English guide to cashflow
- 3 days ago
- 2 min read
Why is cashflow so crucial to good financial management? Our Plain English guide explains why cashflow matters and how to stay in control of your business finances.
What is cashflow?
Cashflow refers to the movement of money into and out of your business over a specific period.
Simply put, cashflow refers to the movement of cash leaving the business (cash outflows) and cash entering the business (cash inflows). The optimal situation is to have a 'positive cashflow position'. This indicates that your inflows exceed your outflows, meaning more money is coming into the business than is going out.
When you're cashflow positive, the main benefit is that you have the available cash needed to fund your day-to-day operations and meet debt repayments.
On the flip side, if you’re in a negative cashflow position, this can be a red flag that the business is facing some financial challenges – and that some serious cost-cutting and/or revenue generation is needed.
How does cashflow affect your business?
Not having enough liquid cash is one of the biggest reasons for companies failing. So it’s absolutely vital that you keep on top of your company’s cashflow position.
Six key cashflow areas to focus on include:
1. Monitoring your cash inflows and outflows – This involves consistently monitoring your cash inflows from sales, loans, and investments, along with managing your cash outflows related to expenses, purchases, and debt repayments.
2. Managing your debtors and creditors – efficiently managing your customer receipts and supplier payments helps smooth out your inflows and outflows – and delivers stable cashflow that’s easier to predict and manage.
3. Getting proactive with your budgeting and forecasting – Developing realistic cash flow budgets and forecasts allows you to anticipate your future cash position. By foreseeing your upcoming cash requirements, you can proactively manage potential deficits or excesses. This process should take into account both fixed and variable overheads.
4. Investing in your cash reserves – with emergency cash reserves in the bank, you know you have the funds to handle unforeseen cashflow issues or sustain your operations during quieter periods. This helps create a more stable and resilient cashflow position.
5. Being in control of your stock inventory – Keeping excess stock on hand ties up cash. Therefore, it's wise to optimise your inventory levels and only produce or order the items you need daily.
6. Tax obligations – Tax payments such as GST, PAYE and income tax can put pressure on your cashflow if you don't plan ahead. Setting aside a portion of each sale in a separate account can help ensure the funds are available when payments are due and avoid any nasty surprises.
How can our firm help you with cashflow management?
Positive cashflow is the beating heart of your business. Collaborating with a skilled adviser ensures that this cash flow remains robust, steady, and aligned with your company's primary objectives.
We will assist you in maintaining precise records, monitoring your income and expenses, and achieving the optimal cash flow position for your business.
Get in touch to chat about improving your cashflow.
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