Cash flow is a bookkeeping term which is often bandied about, but it is one of the most misunderstood ones. In short, your cash flow is the difference between the amount of money you have at the start and at the end of a set period of time. If you have more at the end than what you started with, it is a positive cash flow, with a negative cash flow meaning you have less than you started with.
How Can I Increase My Cash Flow?
Most first year businesses will have a negative cash flow during their first year, with more money going out than coming in. That’s why business owners are always looking for ways to raise their cash flow.
Your cash flow can be increased in eight ways:
- Sell more products or services
- Lower your costs or outgoings
- Sell an asset
- Pay bills slower or later
- Get money paid to you faster from your creditors
- Taking out a loan
- Bringing in more equity
- Raise your prices
But the thing to remember is that your profit and cash flow/working capital are different things. You can have a high working capital or liquid assets because you have sold some of your assets, rather than lots of products, which in the long term decreases the value of your business. Your income is just that, the amount of money you have coming into your business. Your profit is the amount of money you have left after having paid all your expenses.
Cash Flow Forecasting
Though your cash flow may vary between weeks, months and years, it is one of the things which can be forecasted. These projections are based upon what cash flow your business achieved during the same period last year or another set time period. It is important to make projections because they can help you to make decisions for your business including:
- Whether or not you will reach the $60,000 threshold for GST registration
- Measure your performance, see if you meet your financial goals
- Find out if you will have enough money to buy new business assets
- Identify if you will have a shortfall of cash for your business to see if you will need a loan, as well as the repayment amount you can afford to pay back
- Test out different market scenarios before actually putting money into them
Both the Entrepreneur and ANZ have a calculator which can help you forecast your working capital.
What is a Cash Flow Statement?
A cash flow statement shows you the big picture when it comes to how much money your business actually has. It identifies your:
- Operating activities – business revenue and expenses
- Investing activities – physical assets or things like shares
- Financing activities – any loans you took out, which will reduce your future cash in hand because of repayments needing to be done
As your bookkeepers, we can help you with your cash flow identification, forecasting and statement creation. We’ve got plenty of accountancy toys, opps I mean tools, ready and waiting to help you. Give us a call today and together we’ll get your finances sorted.