The ins and outs of cash flow

Cash is the fuel that drives business and is one of the most important indicators of a business’s financial health. Although your Profit and Loss Statement may show a healthy profit and robust sales, it doesn’t mean a thing if you don’t have cash on hand. Many companies are forced to slow their growth simply because they lack the cash inflows necessary to support the cost outflows. Understanding the fundamentals of cash flow management is essential to the sustained growth of every company – large or small.


Cash flow basics


In simple terms, cash flow is the movement of funds in and out of your business. It determines the amount of money available to your business at any point in time.


Positive cash flow – the cash coming into your business from sales etc is more than the amount of cash going out of your business through wages, expenses and payables.

Negative cash flow – the cash flowing out of your business is greater than the cash coming in.


Achieving a positive cash flow takes hard work and discipline. However, effectively managing your income and expenses ensures your business is in a position to be able to fund growth, survive a downturn or absorb an unexpected expense.


Cash flow versus profit


It’s important not to confuse cash flow with profit. In fact, looking at your Profit and Loss Statement will tell you little about your current cash flow situation. Knowing whether you earned a profit or made a loss is not the same as knowing where your money went. Debtors, inventory, expenditure and debt servicing all factor into cash flow.


Profit – the money left once expenses are paid. Profit is used to pay for any new equipment, to pay back bank loans, pay dividends and taxes.

Cash flow – refers to the physical cash in the business. Businesses spend money on wages, overheads, stock and loans well before they bring in any revenue.


The concept of profit is somewhat narrow and only looks at income and expenses at a certain point in time. Cash flow, on the other hand, is more dynamic. It is concerned with the movement of money in and out of a business. More importantly, it is concerned with the time at which the movement of the money takes place.


How to improve cash flow


At its simplest, the goal is to improve the speed with which you turn materials and supplies into products, turn Stock or Work in Progress into receivables, and turn receivables into cash.

Take the following practical steps to better manage your cash flow –


Debtors – Getting your customers to pay just a few days earlier could have a dramatic impact on the amount of cash you have on hand. In order to shorten your receivables period, you’ll need to have a good collection system in place. Try increasing the amount of ways your debtors can pay, start chasing your debtors from the day the account falls due, charge late fees or try a combination of all of these.


Creditors – take advantage of payment terms. If a payment is due in 30 days, don’t pay it any earlier. See if you can pay in instalments or negotiate better prices.


Stock / Work in Progress – The time between stock purchases (or work in progress) and recouping your cost is a major influence on your cash flow. Every item sitting in a warehouse – or every hour that isn’t billed – represents inaccessible capital. Reducing inventory or work in progress days requires an effective management system. Monitoring your sales pipeline and improving stock forecasting will allow you to have more cash in your bank account rather than in your supplier’s bank account.


Costs – Understand your costs first before cutting them. What are your margins? What are the true costs of doing what you do? Who is spending what? Once you know exactly where your money goes, you can be smart about trimming your costs.


Know your pricing – Know every aspect of your pricing intimately so that you know the range you can sell in and still be profitable. If you increase your price by 1%, what does that mean to your bottom line? What does that 1% equate to in volume? Think of it the other way – if you decrease the price by 1%, what do you have to sell in quantity to get back to the same margins?


Develop a cash flow budget – A cash flow budget is a powerful financial tool to help you predict the availability of cash in your business at a given time. If you maintain a weekly budget you’ll see where to expect surges in expenses ahead of your big sales months and where several payments might be due all at once. If you know in July that there will be a shortfall in February you have an opportunity to manage the shortfall before it becomes a problem.


And lastly, if improving your cash flow is a priority, make sure all of your employees understand that. Remember that your employees will be motivated by the targets you set for them.

Further help:

If you’d like to discuss cash flow strategies with one our business improvement advisors, please contact us on 07 3023 4800 or at

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