A cash flow statement is an obligatory aspect of a company’s financial reporting, balance sheet, and profit and loss statement. It indicates the amount of cash or cash equivalents entering and leaving the business over a specified period. The cash flow statement definition does not include net income. Instead, it merely tracks cash transfer through a company’s core operations, investing, and financing practices.
What is a statement of cash flow for investors? Aside from being a standard measure of reporting every business must conform to, it is a useful analytical tool for investors to understand the financials of a company of interest.
Cash flow is one of the most significant issues facing start-ups. Recent research reveals that Australian small businesses are chasing $76 billion in unpaid customer bills. According to the Australian Securities and Investment Commission, poor cash flow was the critical factor in half of all tech firm failures in 2016.
So how can you manage your cash flow more effectively? Here are ten ways you can stay ahead and in control of your finances:
Your credit control system needn’t be complicated – it’s all about getting paid as soon as possible – but it’s essential to put some procedures in place. The basics include setting clear credit limits and payment terms for your customers, sending out invoices promptly, and firmly chasing all debts when due. To help speed up the payment process, ensure you list the correct payment details on sales invoices and offer multiple payment methods. You should also stay on top of customer payments and be quick to stop offering credit to bad payers.
Sales forecasting is all about predicting what’s ahead so you can prepare for cash flow peaks and troughs. You can start forecasting as soon as you have a month’s sales behind you. To work out future demand, use your market knowledge. Think about your pricing, the level of competition, the state of the economy, and so on. Remember, it’s better to be cautious than optimistic – that way, you’ll hopefully avoid nasty surprises.
When it comes to preserving cash flow, think lean and mean. Scrutinise every item you buy, know exactly where your cash is going, and always get value for money. Work out what you need, too – those office pot plants might look nice, but they won’t grow your business.
It’s always worth investigating to see if you can extend payment terms with suppliers. If you can settle your bill in 60 days or even 90 rather than 30, you can hold on to your money for longer, which helps regulate your cash flow. If you’re thinking about making a big order, don’t miss the chance to negotiate. Could you set up a regular payment plan, for example rather than paying off outstanding amounts in one go?
Monitoring stock closely and only ordering what you need is essential to avoid unnecessarily outlaying cash. Work out what sells quickly and profitably in order to keep income steady and make sure you’re not tying up funds in slow-moving items. If you’re looking for a quick cash injection, try selling off old or outdated stock at a lower price.
If you have orders coming in, it’s always tempting to purchase the latest equipment or ‘nice to have’ items. Think wisely before splurging on excessive purchases and try to hold on to liquid cash. If you’re buying assets like computers, ask if the supplier will offer a finance deal over a year or consider taking out an overdraft.
It pays to stay on the right side of the bank. Always keep your books up to date so you can show your figures, just in case you need to borrow. If you’re struggling with repayments, talk to your lender rather than burying your head in the sand.
This is where a third party ‘buys’ your invoice and releases cash based on its value. It won’t suit every business model, but it’s often a good option if you’re growing. Some lenders will give you up to 90% of the invoice amount, but fees can be high so always shop around.
A drop in turnover, customers taking longer to pay, incurring late penalties from the ATO, and being forced to settle supplier invoices later than usual are classic signs of poor cash flow. Don’t ignore the warnings. It’s generally easier to work out ways to increase working capital before you’ve built up a lot of debt.
Sometimes you need to take a step back to see things. If you’re continually struggling and your cash flow statement is poor, ask yourself why. Are your sales too low? Are your products poorly priced? Can you chase payment more quickly? Be level-headed about your venture and its future – if you’re not making a profit, you might need to rethink things.
The Australian government has launched a vast and unprecedented support program to help businesses survive coronavirus effects. Yet many are still struggling, quite understandably, to manage cash flow in these difficult times.
Healthy cash flow in and out of business means you can pay employees and suppliers and rent, rates, taxes and other operating costs on time.Even at the best of times, the challenge is to manage the money coming in (accounts receivable) with the money going out (accounts payable).Ideally, you should be aiming for a consistently favourable cash situation – in other words, more money coming in than is being paid out.
So how can you ensure that you’re managing your finances properly, especially in the current extremely difficult trading situation?
You need to make decisions based on good forecasting and estimates, so establishing a cash flow forecast is essential.
Start by making a list of assumptions on which to base your forecast. This should include a prediction of price increases for your raw materials and what you’ll therefore charge your customers.There should be a projection of your sales growth or reduction, taking into account issues such as the seasons and current trading environment.
You’ll also have to factor in outgoings such as raw material increases and other costs growth.
Here are the key factors to consider in your cash flow forecast:
Once you have a reasonable idea of how your sales will perform, you’ll need to think about how much revenue this will bring in. This may be challenging in the current climate, and you may need to factor in a percentage of sales reduction to forecast more accurately.
Take into account when you get paid for these sales.
For instance, you might have a regular customer who gives you a lot of business but right now has reduced their demand and asked that they delay payment from 60 to 90 days. You’ll need to factor this into your forecast to reflect your current situation.
These typically include wages and salaries, suppliers’ costs, rent and rates, directors’ remuneration, and the purchase of new assets.
You might need to add interest payments and insurance premiums. Use last year’s bank statements as a checklist while anticipating any new incomings and outgoings for the next 12 months, based on internal and external factors.
Creating a cash flow forecast will give you a reasonably accurate view of your opening and closing financial position for a month, six months and 12 months.It’s often said that a cash flow forecast is never finished – for it to be effective, you should continuously review and update it. This is especially pertinent today when operating in uncertain and disruptive times.
Use what’s currently happening in the business to correct any assumptions you made when creating the forecast.It’s also important to stress test your projections – especially during uncertain times.
If sales suddenly fall by a quarter, for instance, will you still be able to pay your essential bills? What will be the impact if you must repair or buy new equipment?
If the coronavirus outbreak has impacted your business, you might be eligible for financial assistance from the government. The federal and state/territory governments have announced economic stimulus packages for companies, which focus on cash flow support through special payments and tax relief. Additional measures are available for companies that employ workers to save jobs.
It’s essential to speak to your bank and accountant if you have one, as well as your industry body and others in your sector about accessing this support.
This form of financing is especially useful if customers are slow in paying their bills.
Essentially, invoice or accounts receivable financing enables you to use your unpaid invoices as security for a loan. You simply pay a percentage of the invoice amount to the lender as a fee for borrowing the money.
Then there is invoice factoring. Here, you sell your unpaid invoices rather than waiting for the client to pay, usually for around 80% to 95% of their total value.
Once the client has paid the factoring company the full amount, the factoring company then pays you. They’ll charge you a service fee, usually around 2% to 5% of the total invoice.
Another option is a business line of credit, also known as revolving credit. Here, you borrow money either in one lump sum or several smaller amounts until you reach the agreed limit of credit.Each draws down becomes a separate loan to be repaid according to a repayment schedule. As with any loan, you pay interest. In this case, you repay each of the loans with interest.
Unlike an overdraft, you don’t have to go into the red on your bank account to access a line of credit.
As coronavirus throws so many businesses into confusion, it’s easy to let financial reporting slip.Financial reporting is essential to ensure you have all the information required to apply for loans and investments, but also so you can keep an eye on the financial health of your business.
Ensuring financial reporting is up to date means keeping an eye on your balance sheet and ensuring your assets and liabilities are still accurate, detailed and itemised. You should be able to see that the two are balanced and that you’re not facing the prospect of insolvency.
Keep an eye, too, on your cash flow statement, as this shows your viability in the short term and helps you to manage your bills.
Similarly, you should pay regular attention to your profit and loss (P&L) account so you can check you’ve made a decent profit over a set period. Ensure your sales and other income, on the one hand, and your costs, on the other, are both correct.
Alongside these critical reports are others such as a stock overview report, an asset register, as well as aged creditor and debtor reports.You’ll be able to see who you need to pursue most actively for payment and which of your creditors you’ll need to pay first.
Ensuring you can meet clients’ needs while also avoiding cash being tied up in stock and paying out for storage is a difficult balance, especially when so much is uncertain in every sector.
Effective inventory management is vital. As with financial management, regular forecasting is useful. This involves frequent communication with customers and suppliers and regular checks on market trends and analysis of past sales.For instance, Supermarkets are keen weather watchers as they want to know when to stock up on barbecue food and accessories – or hot chocolate and comfort foods.
Cloud-based inventory management software with real-time analytics is useful, as any system can utilise data to help generate actionable insights.Adopt a ‘first in, first out’ approach to minimise perishable stock’s chances of going off or other items losing their seasonal relevance.
Keep a closer eye on higher value items than those that have less capital tied up in them. Anticipate reordering requirements even if you’re not placing an order at this point, so you can give suppliers some notice for when you do.Check your receiving process is fast and efficient. This avoids newly arrived stock getting damaged, going off or being sent to the wrong place for storage.
At the other end of the process, as well as making sure that orders are dispatched promptly and carefully, ensure you’re ready to dispose of dead stock.This can free up new storage space more quickly and improve the opportunities for maximising any income potential for products that you can’t sell in the usual way.
Whether you got into business to make money or two choose your hours, your business’s ongoing sustainability depends on the continuing balance of incoming and outgoing cash.
Influenced by a wide variety of factors, cash flow is a critical measure for business owners as a clear indicator of business health. When cash is readily available, and flow is consistent, things are good. If outgoings suddenly spike or incomings dry up, then you’ll be facing a squeeze.
Having a strong grasp on cash flow will allow you to better position your business in tough times by knowing when to cut costs, address pricing issues and even take on additional capital when feasible to do so. This is even more important for seasonal businesses, who can expect to see large cash flow swings in a cyclical fashion.
So, here are a few simple steps business owners and managers can take to improve cash flow and have increased flexibility, greater efficiencies and potential growth opportunities.
This is an estimate of the amount of money you expect to flow in and out of your business, typically over a financial year period. A budget will provide a better understanding of where surpluses and shortages might arise and assists with making decisions such as planning new purchases or the timing of new borrowing facilities.
It’s important, particularly for growing businesses, to forecast their profitability and future cash flow position at the same time – click here for access to my cash flow calculator, which can be used for just this purpose should you not already have online accounting software that can handle this for you.
The sooner the invoice goes out, the sooner you can be paid. Review your payment terms, ensure that you can identify in a timely manner when clients are overdue and have processes in place to follow up with customers promptly.
Other suggestions to consider are to invoice progress payments, make certain you have electronic payment options such as BPAY and offer early payment discounts. If you’re a retailer, you’ll want to make sure your POS systems and processes are as smooth as possible.
No matter what business you’re in, the bottom line here is to make it as easy as possible for your customers or clients to pay you, and that there’s no chance of letting them slip through the net when they fail to do so.
As a prime example, MYOB’s online accounting software has all the features you need and solutions for every stage of your business, including automated invoice reminders, customisable invoice templates and all the reporting you need to track cash flow and more accurately.
There are usually opportunities to negotiate better terms with suppliers, which can e used to help manage your cash flow and even build your relationship with suppliers.
Take time to review current contracts and take advantage of any discounts for prompt payment or extended payment opportunities (paying early is an excellent way to make friends in business).
It may also be worthwhile to seek competitive suppliers and obtain comparative rates.
Meet with your business banker regularly to discuss your current facilities and position to enable a better understanding of the terms of these facilities as well as other available options.
For example, there may be better interest rates available, reduced fees, more convenient ways to pay, or credit availability. This is especially worth considering in natural disaster times, as banks will sometimes offer more generous terms (or at least the offer of a review) for affected businesses.
Note that banks are hesitant to lend for any tax liabilities and will likely request running account balance accounts from the tax department when lending.
Don’t forget to forecast income tax, superannuation liabilities and GST payments, plus ensure all lodgements and payments are made on time. The ATO may negotiate payment plans providing all lodgements are up-to-date, but a general interest charge is currently imposed at 7.91 per cent. The interest is tax-deductible.
In Australia, directors of companies are personally liable for unpaid PAYG withholding and superannuation payments. This will soon extend to GST payments, making it even more important for companies to lodge on time.
In New Zealand, the Holidays Act in combination with Payday Filing may currently be the source of some business owners’ sleepless nights, and it’s generally recommended that you consult closely with a payroll and tax legislation specialist to make sure you don’t run afoul of the increasing number of labour inspectors.
Regardless of your tax jurisdiction, understanding the impact of your obligations on cash flow is an integral part of staying on top of your business health, so I recommend business owners work hard to stay on top of these details or make certain there’s someone significantly invested in your business’s success who can.
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