Cash flow management is a critical tool for managing your business well and helps businesses avoid surprises with their bank balance.
A cash flow statement is retrospective and a cash flow projection or budget looks forward and both are fabulous management tools. Your professional bookkeeper has the information and the skills to help you with cash flow management!
How to Construct a Cash Flow Statement and Budget
Start by looking at past cash flow. Your bookkeeper will be your best ally for this information and to prepare a Cash flow Statement for you.
You may use this to identify which items will fluctuate in the future (income, wages, cost of supplies) and which will not change (rent, phone plans).
For many items, the timing will be predictable; you may have to make your best guess with other items. As with a budget, you can then build different scenarios for the future – best-case scenario, worst-case scenario, and what-if scenarios.
Using the information in your Cash Flow Budget
A Cash Flow Budget is valuable to ensure sufficient cash is available for upcoming obligations and expenses and gives the ability to plan for the future. If there is a shortfall in cash, you can plan action – chase up debts, negotiate payment plans, or put off a new purchase for a while.
It will also allow you to start making some decisions over the longer term such as:
Are you buying more supplies/stock than you are using?
Are there seasons when you need to buy more/less stock or supplies?
Do you need to reduce your customer payment terms so you get paid quicker?
Can you offer your customers a quicker way to pay your bills such as “Pay Now” on your invoices?
Would it be simpler to pay superannuation monthly so the amount does not build up, leaving you to scrabble for the amount each quarter?
Can you afford a new loan repayment?
Should you hire more staff or reduce staff?
Should you have a separate account to put aside GST, Superannuation, and Tax?
Can your bookkeeper help with customer payments or by sorting the bills into payment periods – Now, Next week, Next month - so you know what is coming up?
Having a good understanding of your cash flow will minimise those unpleasant payment surprises and put you in charge so that you can confidently make business decisions.