A Plain English Guide to Cash Flow

Why Cash Flow Matters

Profit is important but profit alone doesn't pay the bills.

A business can be profitable on paper and still experience serious financial pressure if it doesn't have enough cash available when wages, suppliers, tax or loan repayments fall due.

That's why understanding and managing cash flow is such an important part of running a financially healthy business.

What Is Cash Flow?

Cash flow simply measures the movement of money into and out of your business over a particular period.

Cash inflows include money received from customers, loans, investments and other sources.

Cash outflows include supplier payments, wages, rent, tax, loan repayments and other operating expenses.

When more cash is coming in than going out, the business has positive cash flow.

When cash outflows consistently exceed inflows, the business has negative cash flow — which can be an early warning sign that action is required.

Profit and Cash Aren't the Same Thing

This is an important distinction for business owners.

Your Profit & Loss statement may show that the business is profitable, but that doesn't necessarily mean the cash is sitting in your bank account.

Customers may not have paid their invoices yet, cash may be tied up in inventory, loan repayments may be due or significant tax liabilities may be approaching.

Understanding both profitability and cash flow gives you a much clearer picture of the financial health of your business.

Six Areas to Focus On

1. Know What's Coming In and Going Out

Regularly monitor your cash receipts and payments.

Understanding where cash is being generated and where it is being spent can help identify problems before they become serious.

2. Manage Debtors and Creditors

Making sales is only part of the equation. You also need to collect the money.

Prompt invoicing, following up overdue accounts and managing supplier payment terms can significantly improve the timing and predictability of your cash flow.

3. Forecast Ahead

A cash flow forecast helps you understand what your bank balance may look like in the weeks and months ahead.

By identifying potential cash shortages early, you have time to reduce expenditure, improve collections, arrange finance or make other changes before the problem becomes urgent.

4. Maintain a Cash Reserve

Unexpected expenses and difficult trading periods are part of business.

Maintaining an appropriate cash reserve provides a financial buffer and reduces the need to rely on emergency borrowing when something doesn't go according to plan.

5. Don't Tie Up Too Much Cash in Stock

Inventory represents cash sitting on the shelf.

Holding more stock than the business needs can unnecessarily reduce working capital.

Regularly reviewing stock levels can help release cash while still ensuring you have sufficient inventory to meet customer demand.

6. Plan for Tax

Tax obligations can create significant cash flow pressure when they haven't been planned for.

Setting aside money progressively for GST, PAYG withholding, income tax and other liabilities can help ensure the cash is available when payment dates arrive.

Take Control of Your Cash Flow

Good cash flow management isn't simply about checking your bank balance.

It's about understanding what's driving your cash position today and forecasting what that position is likely to look like tomorrow.

At Lockwood & Ward, we help business owners understand their numbers, prepare cash flow forecasts and identify practical ways to improve working capital and financial performance.

If you'd like greater visibility and control over your business cash flow, speak to our team.

Lockwood and Ward Pty Limited | ABN 76 113 938 373Level 9, 50 Clarence Street, Sydney NSW 2000 | Tel: (02) 9299 7044