“I would love to just have more confidence that I’m going to make payroll next month…” We were two hours into a hike,  the conversation had moved from life updates to business concerns. My good friend and fellow business owner continued “I know I have cash in the bank, but I’m not sure at the end of the month what will be left”. 

This is not the first time I have come across this issue. Wondering if you are going to meet payroll, determining when you can make payments to suppliers, or even worrying about having cash available to meet your yearly tax liability are all hot topics among my clients.

 

Why is Cash Flow a concern?

Cash flow can be a problem for businesses of all sizes, it arises from the natural difference in timing between having to make purchases prior to making sales and seeing that cash flow through to your bank account. We have to spend money before we make money and the timing difference between each of these events can be a problem.

Cash flow problems are not necessarily a reason for concern, as they are not always an indication of business performance. However, if not managed correctly, cash flow can lead to drastic business consequences.

 

How to Identify Cash Flow problems:

The first step to solving cash problems is to identify them. In your personal life you can look at your bank statement, see a number and be like “Ok great, I’ve got money”, or “eeek, ok better be a bit tighter this month”. In business, getting to those same conclusions take a little bit more work.

Introducing the cash flow buckets, this simple self-assessment will help you to determine if your business is in a positive or negative cash flow position.

= Take the combined balance in your bank accounts

+ Plus, cash inflows expected in the next 30 days

– Less the following buckets:

Bucket 1: You yearly tax liability.

Use your yearly business profit times by 30% (or an appropriate average income tax rate) to calculate the year to date amount you will owe to cover your yearly taxes.

Bucket 2: Your GST or Sales Tax liability.

Total the amount you have collected in sales tax, less the amount you have paid in sales tax to calculate how much you will owe on your return.

Bucket 3: Your emergency bucket:

We all love an emergency bucket! Aim for 2-3 months of business expenses.

Bucket 4: Upcoming expenses:

Looking forward, tally up all the expenses you will need to cover over the next 30 days. Think rent, payroll, subscriptions, and orders to suppliers.

Bucket 5: Owners Pay

After you have deducted the amounts in buckets 1 – 4, anything left over is available to be paid out to yourself as the business owner or invested back into the business for business growth initiatives.

A negative cash balance could indicate some future cash flow shortages, while a positive balance likely indicates ample cash being available in your business.

 

When is Cash Flow A Problem?

Cash flow problems should also be assessed against other business key performance indicators such as business revenue, expenses, and profit. Furthermore, cash flow shortages should often be followed by periods of cash flow excess. Ongoing shortages, and/or consistent reduced business profit could be a cause for concern.

The information and recommendations outlined in this article are general in nature and may not be suitable for your business. You should always seek advice from a qualified accounting professional before implementing any changes.