Cash Flow 101 for your business

Money coming in to a business makes everything else possible: paying bills and staff, investing for growth, being profitable. It is also important that money flows out of the business to the right people at the right time. 

Your accountant calls this movement of money 'cash flow'. Here are the basics for small to medium businesses - call it Cash Flow 101.

What is cash flow 101?

Put simply, cash flow is the money that comes into your business from earnings and flows out as expenses. But there is one important thing cash flow is not. 

"Cash flow is not profit," says Eleonora Zappia, chartered accountant and owner of Eleonora Zappia & Associates, an accountancy firm specialising in assisting businesses.

"Profit is income less expenses. Cash flow is the money you have in the bank and how much you have available to pay your creditors, take wages and live. For a small business, it's vital that cash flow is positive."

Cash flow importance

"Cash flow is the lifeblood of business," Eleonora says. "A lot of businesses go broke not because they are unprofitable, but because they don't have the cash flow to sustain the business." 

Indeed, cash flow problems can be as close as one late payment by a client or one client going bust.

"A good accountant will tell you to keep your debtors under control. Keep your lines of communication open. If they can't pay you in full, can you get a series of payments? You could try keeping the amount they owe under control."

Cash: where does it come from? 

• Sales of goods and services
• Cash injections from business owners
• Provision of overdraft facilities and other borrowings
• Interest on savings and investments
• Sale of assets
• Shareholder investments

Cash: where does it go? 

• Buying stock, raw materials and wholesale items
• Purchasing capital assets like tools, computers and furniture
• Paying staff salaries, superannuation and other entitlements
• Repaying business loans, including interest
• Payment of dividends to shareholders
• Taxation

Watch closely, be involved 

"At all times the business owner must know who owes the business money and to whom the business owes money," says Eleonora. "You can make all the money you want, but if people aren't paying you, it's quite likely the business will fail."

Consequences of poor cash flow management

Worst case scenario? Your business could fold.

"Before you get to that point, you get bad credit ratings with suppliers, a bad name in the industry, and those things can have flow-on effects after the business has closed if you are trying to start again," says Eleonora.

"And if staff learn there are financial problems in the business, you may lose vital employees, compounding your problems."

Keep the cash flowing

Speak to an accountant today to ensure you're up to speed with Cash Flow 101. With the right advice and some prudent planning, you can protect your cash position, and hence your business, for the long term.