The importance of cash flow: the fuel for your business

Key points

• Even businesses that are making good profits can suffer from negative cash flow.
• Managing your cash flow is all about managing the gap between money coming in and going out.
• Write a cash flow forecast and manage your payments and expenses.

It’s imperative that a business has enough cash on hand to meet its financial obligations. Not being able to do so, could put your business at risk. Understand the importance of cash flow and how to manage it.

Paul Presland, General Manager ANZ Small Business, provides 5 tips for managing business cash flow.

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The importance of cash flow

Cash flow refers to the ebb and flow of money coming into, or going out of, your business over a period of time.

Some people consider cash flow even more important than profits because poor cash flow could bring your business to a grinding halt.

Consider a scenario where you sell $20,000 of stock for $40,000, but you may not get paid for 60 days. You still have to re-order replacement stock as well as pay rent, wages and other expenses during that period. And if you can’t, someone you owe money could take legal action against you, including trying to close down your business.

Even if poor cash flow doesn’t put your business at risk, it might hurt your potential for growth. Having good cash flow is important for:     

• Knowing when to scale your business
• Maintaining good business relationships
• Handling large orders
• Paying debts and regular bills.

Managing your cash flow

How you plan and manage your business’s cash flow will depend on the size and complexity of your business.

Cash flow management is all about managing the gap between when the money comes in and when your bills are due. The key is anticipating when you may have challenges and taking timely steps to manage the situation rather than reacting when it does happen. Here are five tips to help manage your cash flow.

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1. Write a cash flow forecast

A cash flow forecast may be the most important tool in cash flow management and the first place to start. It allows you to project how much cash will be coming into your business and how much will be going out at different times, so you can identify where you may have cash shortages. Knowing this information can inform business decisions like when to purchase new equipment or hire more employees.

A cash flow forecast can be as simple as a table or spreadsheet where you plug in your incomings and outgoings. Once you have your forecast, check your actual cash position against your projection regularly.

To get started, download our Cash flow forecast template (xlsx).

2. Separate 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 track expenses.

3. Get paid on time by managing payments

Managing your incoming payments so that you have shorter pay cycles can help with a healthy cash flow. Manage your incoming payments by: 

• Sending invoices as soon as possible
• Encouraging customers to pay early
• Giving customers a variety of payment options
• Requesting a deposit for large payments.

Read our tips for receiving customer payments faster.

4. Control your expenses

Reducing or managing your expenses can help achieve effective cash flow. Look for opportunities to save money by managing your outgoings. Here are some things to consider:

• Have flexible staffing arrangements
• Review your utility providers to see if you can reduce costs
• Use technology to create efficiencies.

Read our tips for keeping costs down.

5. Manage stock effectively

Paying suppliers for stock that you can't move may contribute to negative cash flow. You’ll need to find a balance between the income you get from customers and the stock you purchase. To manage your stock more efficiently consider:

• Modifying your stock to match your orders
• Conduct regular inventory reviews
• If your terms of trade allow, make use of extra time to pay for goods
• Avoid holding excess stock.

Next steps

Speak with your local ANZ Small Business Specialist about your cash flow needs.

Use the ANZ Cash flow forecast template (xlsx).

Download the Business cash flow checklist (PDF) and our 5 Tips to manage cash flow diagram (PDF).