Business cash flow: The what, why and how

February 20, 2024
minutes to read
Jaala Alex
Table of Contents

Not sure how to forecast future cash flows? We share how to start a cash flow forecast and practical tips to help you manage your business’ cash flow.

Lately, many businesses have found out just how quickly cash flow can dry up. This week, our friends from bookkeeping and accounting firm Project Alfred are taking over the blog to give the Thriday community a primer on business cash flow management. Here’s how they help their clients’ thrive.

If you only take one thing from this article, let it be this: every business needs cash to grow, but you also need to actively manage your business cash flow. Something we’re passionate about at Project Alfred is educating people about the value of strategic accounting and we hate to break it to you, but having a budget is not the same as managing your cash flow. 

This is a conversation we have with many of our clients. If you’ve got big dreams for your business (and of course you do!), we’ve compiled this simple primer on how to start actively managing your cash flow so that your biz is better positioned to survive and thrive every day (because we all know lots of industries are struggling with cash flow woes right now). 

There’s two key things we’re going to cover:
  1. Cash flow forecasting/modelling – the strategic stuff
  2. Proactive money management – the practical stuff

Okay, go! 

What is cash flow?

Cash flow is how money goes in and out of your business, and has a central focus on timing. While a budget is essentially setting targets for income and expenses, a business cash flow forecast goes several steps further, also considering assets and liabilities, and the timing of how all of these interact. An effective cash flow forecast (and this can be as simple as a well-made spreadsheet model) means you can effectively identify when your business might run out of cash, based on the times of month/year that your liabilities and expenses might exceed your income and stretch your cash reserves.  

Why your small business needs a cash flow forecast

In our experience, a lot of (profitable) businesses don't look at cash flow apart from checking how much money’s in their bank account, but many businesses learn the hard way that your liabilities don’t go away when your customers do. 

So how can a cash flow forecast help a business? If you haven't done a projection, you might not know when cash will run out if you have a bad month, two months or three months (knock on wood), whether that’s caused by being unable to trade (snap lockdowns anyone?) or from a seasonal lull in sales that coincides with a huge month in bills and tax obligations. 

While it might feel daunting seeing your business’ cash flow projections, the biggest pro of having this information is that you now have some control to plan ahead of time. Trust us, when businesses get blindsided by a cash flow crisis, that is when they go bust (and fast). 

The other big pro: your cash flow forecast might reveal you’re in a stronger financial position than you thought! In that situation, you can stress less about a slow day or two, and even start looking at how you can invest some of your extra resources into your business (all businesses need cash to grow, so if you have it spare, it could be better to spend it than have it sitting in the bank). 

(And by the way, there are no cons to having a cash flow forecast. Cash is king but knowledge is power.)

Having a healthy level of worry about cash flow is actually a really good thing, but let’s channel that energy into action. We’re advocates for simple but effective systems that improve the visibility of your incomings and outgoings. Here’s three things to start with to start proactively managing your cash flow.

How to forecast future cash flows

Spreadsheets are your new best friend. There are tools you can use, but we set up most of our clients with a cloud-based spreadsheet for ultimate flexibility, and for most businesses, a simple solution is often the best.

If you’re wondering how to forecast future cash flows, the short answer is to start plugging in as much information as you can into a cash flow spreadsheet. 

The longer version: ideally you have some historical data from the last year, and some idea of how many new clients/customers you’ve acquired, but your cash flow forecast is going to include data on your:

  • Income and expenses
  • Assets and liabilities 
  • Timing of all of the above – this is the key, so don’t skimp on the details. 

When you’re setting up a cash flow spreadsheet, understand that it’s actually a predictive model, so you need to know what assumptions you’re asking the model to use to make predictions of what your cash flow situation is going to be at any given point in time. When we’re helping clients set up a cash flow forecast, we discuss everything from how they invoice, timing of income and expenses, and if there’s anything specific to their biz they need to consider.

Tip to thrive: Don’t just rely on the payment terms on your invoice for predicting when you’ll be paid. Your payment terms might be 14 days, but how many of your clients actually pay on time? Xero reported in 2019 that the average late invoice is actually paid 23 days late. If you know you often have a high percentage of accounts receivable overdue, this can seriously impact your bottom line, but – knowledge is power – you can set up systems to help solve this and also factor this into your cash flow forecast and ongoing management.

How to manage your business’ cash flow through the year

Splitting your bank accounts is the easiest way to get visibility of (and proactively manage) business cash flow. For most businesses, these are the three accounts you need to be able to see what your business’ incomings and outgoings are at any point in time: 

  • Income account – where any money coming into your business goes
  • Regular expenses account – where you’ll put money aside for paying invoices, bills, wages and other incidental expenses
  • Future liabilities account – where you’ll allocate money to pay your tax and GST, PAYG and superannuation

It could look like this in the Thriday platform:

When cash lands in your income account, delegate it out to make sure your expenses and liabilities are always covered. At the bare minimum, you should be doing this once a week. Each time you pay wages, transfer the PAYG and superannuation component to your future liabilities account. 

Every week, you should also delegate money from your income account to your regular expenses account to pay quarterly bills or invoices as they land in your inbox. When it comes to paying your bills and liabilities, in theory your account should balance (net out), as you’ve put aside the exact amount that you owe. 

When you make a sale or receive payment, transfer the percentage you need to cover your tax on your revenue and GST to your future liabilities account. The amount of tax each business/industry pays differs so the goal is to work out your tax estimate and thus know what percentage to transfer to your future liabilities account from each payment you receive. 

If you’re GST registered it often isn’t necessary to put aside the full 10% of your revenue into your future liabilities account because you can also claim your GST expenses, but don’t rely on a refund of GST on your expenses – make sure you’re covered in advance (thank you cash flow forecast). 

The more you automate, the easier it becomes

Managing business cash flow is make or break, no matter your size and current profitability, but fortunately, once you put in the initial legwork to understand your business’ cash flow, you can set up systems to automate many of these “delegation activities” as well as reminders for everything that can’t be automated (yet). 

Before you put this in the too-hard basket, know that this will save you SO much time and stress (and possibly even save your business). Also, we’re here to help if you need – delegating things that are outside your skillset or that you don’t have time for is a muscle every business owner needs to flex from time to time 💪 

Project Alfred is an Australian online accounting firm. They bring together a team of expert bookkeepers and accountants who love using their financial know-how to help businesses grow. They relish implementing automated, streamlined processes that save people time, and take immense pride in providing transparent, honest, straightforward advice. 

DISCLAIMER: Team Thrive Pty Ltd ABN 15 637 676 496 (Thriday) is an authorised representative (No.1297601) of Regional Australia Bank ABN 21 087 650 360  AFSL 241167 (Regional Australia Bank).  Regional Australia Bank is the issuer of the transaction account and debit card available through Thriday. Any information provided by Thriday is general in nature and does not take into account your personal situation. You should consider whether Thriday is appropriate for you.

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