Small business cash flow

Key takeaways

• Cash flow refers to the flow of money coming in and going out of your business – usually known as your income and expenses.
• A cash flow forecast is one of the most important documents you’ll create as a business owner, helping you to spot potential shortfalls and growth opportunities.
• ANZ’s cash flow forecast template (xlsx) can help you get started, with step-by-step instructions, pre-filled line items and handy tips.

When it comes to running your business, one of the single most important things you need to consider is cash flow – basically, how you balance the money you're being paid with the money you need to pay others. 

But managing the finances of a business can be very different from managing your personal banking and comes with a unique set of challenges and considerations. This article will walk you through the basics of cash flow management and the importance of cash flow forecasting, as well as providing a few handy tips for staying on top of your incomings and outgoings.

An introduction to cash flow

Almost all the money you handle as a business owner can be split into two types: income and expenses.

Your income is the money you receive from running your business. Typically, you receive income from selling goods and services, but it can also come from other sources, like leasing property and assets or licensing intellectual property. 

Your expenses are what you need to pay in order to run your business. Examples include stock purchases, employee wages, rent and licensing or franchise fees.

The way you manage your income and expenses is what we refer to as “cash flow”.

Why is managing cash flow important?

Let’s imagine you sell $20,000 of stock for $40,000, but it’s going to take 60 days before you get paid.

While you’re waiting for the money to arrive, you’re going to have to continue paying for stock, wages, rent and any other expenses you face on a regular basis. 

Managing cash flow is about ensuring you always have enough cash on hand to cover your expenses – something that almost 80% of business owners have issues with. Being unable to pay your bills can damage your relationships with suppliers and customers, or in some cases, lead to legal action or the forced closure of your business.

But cash flow isn’t simply about avoiding trouble. Having cash on hand is also important when it comes to planning for growth. 

To continue with the example above, your successful sale leads to a rush of orders from other customers and now you need to buy $60,000 of new stock to cover them all. How do you ensure you have enough money to meet the new demand?

How to create a cash flow forecast

A cash flow forecast is one of the most important documents you’ll create as a business owner.

In short, your cash flow forecast tells you when and how much cash is coming into and out of your business in a given period, so that you can identify times when you may have cash shortages or when you may be better placed to grow your business. Your forecast will also predict how much surplus or deficit should be left over at the end of that period.

You can create both short-term (anywhere up to 12 months) and long-term (two to five years) cash flow forecasts. Short-term forecasts tend to be more detailed and focus on the day-to-day operations of your business, while long-term forecasts are less precise but can help you plan for expansions, product development or new investments.

Your cash flow forecast will not only help you to make day-to-day business decisions, but also to plan for the future, identify any looming trouble spots or wasted expenditure, and apply for funding from your financial institution.

Using the ANZ cash flow forecast template

In its simplest form, a cash flow forecast can take the form of a spreadsheet into which you enter your incomings and outgoings over a given period of time.

However, once you start putting down everything on paper, the task can quickly begin to feel overwhelming.

To help you get started, we’ve created a simple Excel spreadsheet to help you plan out your income and expenses for the coming year. The template contains step-by-step instructions, a cash flow projection example and handy tips.

Download our Cash flow forecast template (xlsx).

Getting the most out of your cash flow forecast

While your own cash flow forecast will be unique to your business, there are a few things that everyone should keep in mind while preparing their forecast.

• Be precise: while a forecast will always require some assumptions, try to be as accurate as possible. If there are exact cost figures, use them. If you need to make a guess about sales, use everything you know about previous months and market trends to improve your cash flow accuracy.
• Write down your assumptions: if you’re forecasting a seasonal cash flow increase of 50%, what assumptions are you making to justify the prediction? Write your assumptions down so that potential lenders or investors understand what’s behind your figures.
• Keep up to date: set aside time each month to go over your forecast, compare it with the actual incomings and outgoings for the previous month and use what you’ve learned to adjust your forecasts.
• Talk to an accountant: your accountant is one of your best assets. Run your figures past them to make sure your forecast is an accurate reflection of your business.
• Automate your accounts: the easiest way to stay up to date is if you run all your income and expenses through accounting software such as Xero, QuickBooks and MYOB. 

Helpful ANZ resources and offers:

• Six reasons your business needs and accountant
• The importance of accounting software for any business
• ANZ customers get 11 months free when they pay for one month of MYOB

Tips to help you manage cash flow

While creating an accurate cash flow forecast should be your priority, there are a number of other things you can do to help keep your cash flow in balance.

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Separate your business and personal accounts

Make sure you have a separate account for your business and personal finances. Keeping your accounts separate will make it easier to understand your business’s cash position, forecast your cash flow and prepare for unexpected business expenses.

Helpful ANZ resources:

• Benefits of separating personal and business finance
• The importance of a business emergency fund

Shorten your payment cycles

A sale can’t help your cash flow until the money arrives in your account. While this can feel beyond your control, there are a few things you can do to try and shorten your payment cycles.

• Send invoices as soon as possible
• Encourage customers to pay early
• Give customers a variety of payment options
• Request a deposit for large payments

Helpful ANZ resources:

• Five tips for receiving customer payments faster
• What you need to know about invoice payments
• Merchants and payments

Control your expenses

While income and expenses make up your cash flow, at the end of the day it’s the expenses that cause the trouble. You should always be on the lookout for ways to reduce or eliminate your overheads. Here are some things to consider:

• Introduce flexible staffing arrangements
• Review your utility and insurance providers to see if you can find cheaper options
• Analyse your marketing spend to make sure it’s producing results

Read our tips for reducing business overhead costs.

Manage stock effectively

It can be hard to predict exactly how much stock you’ll need to meet customer demand. But paying suppliers for stock you can’t sell can lead to negative cash flow traps. To manage your stock more effectively, you could try:

• Negotiating to return unsold stock to suppliers
• Conducting regular inventory reviews
• Making use of extra time to pay for goods (if the terms of sale allow)
• Avoid holding excess stock

Taking control of your cash flow

Managing your cash flow is one of the most important skills you can develop as a business owner. Think of your cash flow forecast as your roadmap, helping you to navigate the financial challenges that come with running a business. 

But taking control of your cash flow isn’t simply about avoiding trouble. When you understand your cash flow, you can better plan for the future and build the financial foundation your business needs to grow.

Helpful ANZ resources:

• Download our Cash flow forecast template (xlsx) 
• Balance your income and expenses with our cash flow improvement checklist (PDF)