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Cashflow - The Life Blood of Business

Updated: May 30, 2023

Cashflow Management - ShapedLogic

Recently I was asked what I believe to be the key business metric for a small business start-up. My answer is CASHFLOW. Without any doubt it is the one element of a business that is essential for long term success and growth. Let be make it clear that I am not a financial planner, accountant, or tax lawyer. But I have run many businesses large and small overtime and seen the good, the bad and the really ugly side of business cashflow. The state of cashflow has a profound impact on a business, its management, employees and customers. Like all business issues there are always multiple ways to approach a solution. Some of the less likely solutions that I have heard and would not recommend:

  • Get another credit card

  • We will just sell more

  • Hold on paying BAS

  • Don't pay superannuation

  • Borrow from the family

  • Run a 50% off discount campaign

Entrepreneurs are, in general, a very optimistic bunch of people. But optimism does not create liquidity. If you are starting a business, or running a business, you need to have a good understanding of the businesses cashflow and ensure you have a cashflow forecast and plan.

According to Dunn & Bradstreet 90% of small businesses fail due to cashflow stress.

business failures by year Australia (ABS)
Business Startup and Close Rate Annually

In 2022 over 300,000 businesses exited (closed). Cashflow is crucial to the survival and growth of any business, and it's even more vital for small businesses. Cashflow is the life blood of the business it is the fuel that keeps the businesses engine running and management sleeping better.

  1. Solvency: Cashflow is a measure of a company's ability to pay its expenses on time. If a business does not have enough cash to cover its short-term liabilities, it may face financial difficulties or even liquidation.

  2. Investments: Positive Cashflow can be reinvested back into the business to help it grow. This can include purchasing new equipment, expanding product lines, or hiring more staff. Without adequate Cashflow, it can be challenging for a small business to make these necessary investments.

  3. Flexibility: Cashflow provides the flexibility that a small business needs to adapt to changing market conditions or unexpected opportunities. For instance, if a new market opportunity arises, sufficient Cashflow allows a business to take advantage of it swiftly.

  4. Supplier & Creditor Relationships: Adequate Cashflow enables a small business to pay suppliers and creditors on time, which helps to maintain healthy business relationships and a good credit rating. This could also lead to better trade credit terms.

  5. Buffer Against Uncertainties: Having a positive Cashflow can serve as a financial buffer against unforeseen expenses or a sudden drop in revenue. This is particularly important for small businesses, which may not have the financial reserves of larger organizations.

  6. Attraction for Investors or Lenders: Positive and consistent Cashflow can make a small business more attractive to investors or lenders, as it's a sign of good financial health and effective management.

  7. Employee Wages and Benefits: Cashflow is needed to pay salaries and wages. If Cashflow becomes a problem, it could lead to layoffs, reduced morale, and diminished productivity.

Profit does Not Equal Cashflow

Remember, profit does not equate to Cashflow. A business can be profitable on paper, but if the cash is not coming in at the right time, the business may not be able to survive. Hence, managing Cashflow effectively is crucial. It's recommended that small businesses keep a regular check on their Cashflow statement along with their income statement and balance sheet.

Cashflow is the movement of money in and out of a business. It is important for small businesses to manage their Cashflow effectively in order to stay afloat. Here are some of the reasons why Cashflow is important to small businesses:

  • To pay bills on time. If a business does not have enough cash on hand to pay its bills, it may be forced to go into debt or even shut down.

  • To avoid late fees. Many businesses charge late fees for bills that are not paid on time. These fees can add up quickly and put a strain on a small business's finances.

  • To maintain a good credit rating. A good credit rating is important for small businesses that need to borrow money from banks or other lenders. If a business has a poor credit rating, it may be more difficult to get loans or lines of credit.

  • To grow the business. A business with positive Cashflow has the resources to invest in growth, such as hiring new employees, expanding into new markets, or developing new products or services.

Managing Cashflow

There are several things that small businesses can do to manage their Cashflow effectively. These include:

  • Create a Cashflow forecast. A Cashflow forecast is a prediction of how much money a business will have coming in and going out over a period of time. This can help businesses identify potential Cashflow problems and take steps to address them.

  • Set up a system for tracking Cashflow. This system should track all of the money that comes into and goes out of the business, including sales, expenses, and payments.

  • Pay bills on time. This may seem like a no-brainer, but it is important to pay bills on time in order to avoid late fees and maintain a good credit rating.

  • Invest in Cashflow management software. There are software programs that can help businesses manage their Cashflow more effectively. These programs can help businesses track their Cashflow, identify potential problems, and make informed decisions about how to manage their finances. Most good accounting systems will have cashflow management and reporting, for example Xero and MYOB.

Cashflow Templates and DIY

You can easily create and manage your own cashflow forecast and there are numerous free templates available. If you download a template make sure it is from a reputable Australian source. You can go to your bank and get cashflow advice although as most of you probably know talking to a real person at the bank can be a challenge. But if you look on your bank website you will find useful information. So a few examples:

There is only one rule to follow when doing a cashflow forecast and that is to be honest with yourself. The only real cash that your business has is in the bank.

Business Activity Statement (BAS)

The business activity statement is submitted to the Australian Taxation Office by registered business entities to report their tax obligations, including goods and services tax, pay as you go withholding, pay as you go instalments, fringe benefits tax, wine equalisation tax and luxury car tax.

Although the BAS can be reported on a quarterly basis that can often result in the payment obligation being higher than cashflow will allow. Debts to the ATO can rise rapidly and can be a key contributor to poor cashflow management.

Superannuation impact on cashflow

Many startup businesses rush to hire people, but new staff means salaries and superannuation. In Australia Superannuation represents an ongoing cost for businesses, it is a necessary part of doing business and provides substantial benefits for employees. Therefore, careful Cashflow management is needed to ensure that superannuation obligations do not disrupt the business's financial stability.

Super Guarantee Rates 2023

Australian superannuation has a significant impact on small business Cashflow. The Superannuation Guarantee (SG) is a compulsory contribution that employers must make to their employees' superannuation funds. The SG rate is currently 10.5% of an employee's salary or wages. This means that for every $100 that an employee earns, their employer must contribute $10.50 to their superannuation fund.

The SG can have a negative impact on small business Cashflow because it reduces the amount of money that is available to the business to pay for other expenses, such as rent, wages, and materials. This can be a challenge for small businesses, especially those that are just starting out or that are operating on a tight budget. There are a few things that small businesses can do to manage the impact of the SG on their Cashflow. These include:

  1. Obligatory Expense: Superannuation is a compulsory expense for employers. Thus, it directly impacts the business's cash outflow. The more employees a business has, the higher the superannuation expense will be.

  2. Cashflow Planning: Since superannuation payments are mandatory and occur regularly, they need to be factored into the business's Cashflow planning. Businesses need to ensure they have enough cash to cover these expenses when they come due.

  3. Penalties for Non-Compliance: If a business fails to pay the correct superannuation amounts on time, it may have to pay the Superannuation Guarantee Charge (SGC), which is not tax-deductible. The SGC includes the unpaid superannuation amounts, an interest charge, and an administration fee. This can lead to an unexpected cash outflow.

  4. Employee Retention: While superannuation is a cash outflow, it's also an important part of an employee's remuneration package. Offering a superannuation fund can help businesses attract and retain staff, which can have long-term benefits for the business.

  5. Tax Implications: Superannuation contributions are typically tax-deductible for employers, which can decrease a business's tax liability and potentially free up some Cashflow.

  6. Plan ahead: Small businesses should plan ahead for the SG contributions that they will need to make. This will help to ensure that they have the necessary funds available when they are due.

Where can a small business get cash?

One of the first things that you will be asked when you start looking for more cash is for a cashflow forecast. Banks, investors, capital funds will all want a positive cashflow that guarantees they get their money back. Bit of a Catch22 situation.

Finding business funding and investors - ShapedLogic

This is a common question that I have been asked many times. Many small businesses that start up are self-funded. The owner or owners contribute the initial cash to get the business started operating with the expectation that the business will generate income that will be sustainable. The most important recommendation is to build a business plan before starting the business.

Once the business is operating the need for steady cashflow is critical. If the business owner funds that cashflow through personal resources and credit, then it places a great deal of pressure on the business.

Banks have in the past been reticent about loaning small businesses funds. They will generally require personal guarantees from the owner or directors of the business and these loans will be secured by personal property. Business loan rates are generally much higher than personal loans so be cautious.

There are numerous business investors such as Sydney Angels which will bring investors together and match them with investment opportunities. There are also venture capital funds and you can find a list of funds at services like Venture capital is money invested in a business, usually a start-up, that is seen as having strong growth potential. It is typically provided by investors who expect to receive a high return on their investment.

TIP: If you are looking for investment funds then be prepared. Investors will look for your Business Plan, Financials history, Sales analysis, and Cashflow report.

Proactive Planning, Forecasting and Reporting

By managing cashflow effectively, small businesses can avoid financial problems and position themselves for growth. It takes a little work, but it is essential. There are people who can help with accredited financial planners and accountants being at the top of the list. Yes, they will cost money and it sometimes seems difficult to spend on professional advice. But just as you would not leave your health in the hands of Doctor Google make sure you take the same precautionary approach with the life blood of your business.

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Author: John Debrincat FACS, MAICD

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