Cashflow is the lifeline of any business, but especially so for small businesses. Cashflow will keep your business afloat, and it will allow for growth. Unfortunately, not all businesses owners have a full understanding of their cashflow until it is too late, and they find themselves in a position where they no longer have the resources to pay their expenses. But, you don’t have to suffer the same fate! Allow us to teach or remind you exactly how cashflow works. Firstly, to understand how cashflow works, we need to understand what it is and how to calculate it.
What is Cashflow?
Cashflow is the total amount of money that flows into your business and out of your business. You have a positive cashflow when more money is flowing in, rather than out, and therefore your business is in the black. Alternatively, if your business has negative cashflow then more money is flowing out of your business, rather than in, your company is in the red.
In simple terms, a cashflow statement will summarise the amount of cash and cash equivalents entering and leaving your business. We find that to properly understand cashflow, it is easier to begin with what it is not. Importantly, cashflow is not profit. Profit is the difference between revenue and expenses. A business may be unprofitable despite maintaining a strong cashflow and vice versa. We often hear clients confused over why when their profit and loss report shows a profit they still have no money in the bank. Don’t forget that while they correlate, they are different. There are many factors that affect your cashflow such as a change in stock levels, changes to accounts payable or receivable, when tax is due to name a few.
How to calculate my Cashflow statement.
It seems easy to say that cashflow is simply the money in less the money out of your business but what should and shouldn’t be included? A cashflow statement is often an Excel spreadsheet and will include the following:
- Start off with the starting account balance of all bank accounts
- Add the money in. This includes things such as payment by customers for the sale of goods or services, refunds for tax such as GST, funds introduced into the business by shareholders or as loans. For cashflow forecasts this is your predicted income.
- Deduct the money out. This includes payment for any purchases you have made (creditors invoices), wages, rent, raw materials, taxes, asset purchases, loan payments etc. If you are completing a cashflow forecast then this is your predicted outgoings.
Following the above 3 steps will leave you with an account balance and the ability to manage the peaks and troughs in your cashflow. Daily or weekly cashflows help you manage the day-to-day cashflow of your business but longer forecasts help you to plan for the future and identify any issues around lack of funding or potentially periods of significant ‘spare’ cash that you can use for growth or to pay off debt.
Below we have linked a great 3-minute video, that we think perfectly explains just what cashflow is and how it works!
If you have any concerns or would like assistance with your cashflow please call the team 04 2329199 or fill in your details below and we will be in touch.
