Long Term Business Survival Needs Cash Flow
Cash flow is of vital importance to the health of a business. Many businesses can exist in the short-term even if they are making a loss by delaying payments to creditors, for example, but no business can survive long without enough cash to meet its immediate needs.
Net Cash Flow
When cash comes into the business, mostly through the sales of goods and services, it then flows out again to pay for your expenses, such as raw materials, rent, transport, etc. The difference between to two is called the Net Cash flow. This is either positive or negative. A positive cash flow occurs when a business receives more money than it is spending, which enables it to pay its bills on time. This is the goal scenario for every business.
Negative Cash Flow
However, too often a business will have a negative cash flow, which means it is receiving less cash than it’s spending. Sometimes you can correct this by reducing some of your expenditure or moving payments for some things into another month; but sometimes, the reason a business is experiencing negative cash flow is because they didn’t properly plan beforehand. This is a much harder fix.
Don’t Forget Your Obligations to the ATO!
When determining your cash flow, it’s important that you don’t spread your expenses over the year or average them; instead keep them in the months that they’re due so you can ensure that you have enough cash to meet your expenses. It’s also important that you don’t overlook things like income tax, which can push some business’s cash flow into the red if it’s not properly accounted for.
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With this you can then begin to calculate a profit and loss statement for your business, which we’ll cover in our next post. You can read more from our financial planning series at our blog, or for a step-by-step guide on starting and managing a small business, enrol in our Small Business Management course.