Cash Flow

Cash Flow

Cash flow is simply the difference between the amounts of cash coming into your business compared to the amount of cash going out. If your cash outflows exceed your cash inflow for too long a period, you will soon be out of business. Cash flow is the most critical element in any business, especially in the initial phase and during periods of growth. The problem is that cash inflows usually lag behind expenditure outgoings. You need to concentrate on speeding up the inflows and slowing down the outflows.

Cash Inflows
• shareholder investment
• borrowings like a bank term loan or overdraft
• payments for goods or services from your customers

Cash Outflows
• wages and salaries
• operating expenses like rent, electricity, insurance, interest, etc
• payments to your suppliers for goods and services, raw materials, etc
• capital expenditure on cars, machinery, computers, office equipment
• repayment of loans
• Income tax, ACC levies, GST payments, FBT payments

Many of these payments, like tax instalments and salaries, have to be made on a fixed date. It is a matter of planning your cash flow so that you have sufficient money to meet these payments. This is where a Cash Flow Budget can show you the times when you will require additional funding to see the business through a period of heavy cash outflow. This funding may come from an overdraft, a term bank loan or shareholder investment.
A typical Cash Flow Budget would look like this:

Cash Flow Budget

Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar
Budgeted
Sales 7000 6000 6000 4000 6000 7000 8000 9000 8000 6000 6000 9000
Cash inflow
Cash sales
Creditors

1000

7500

800

6000

700

5000

500

5000

600

3500

700

5000

700

5500

800

6500

800

7500

700

6000

700

5000

800

5000
Total cash inflow 8500 6800 5700 5500 4100 5700 6200 7300 8300 6700 5700 8500
Cash outflow
Stock
Expenses
Fixed assets

1000
4000
2000




1000
4000

1000
4000

1000
4000

2000
4000
3000

2000
4000

3000
4000
2000

2000
4000



2000
4000

3000
4000

2000
4000

2000
4000
Total cash outflow 7000 5000 5000 5000 9000 6000 9000 6000 6000 7000 6000 6000
Surplus 1500 1800 700 500 (4900) 300 (2800) 1300 2300 (300) 300 2500
Bank balance 5000 6800 7500 8000 3100 3400 600 1900 4200 3900 4200 6700

The monthly surplus or cash deficit will enable you to determine your required borrowings from your bank or elsewhere. The months with a big cash shortfall may need temporary funding additional to your normal overdraft level.

There are several ways of improving your cash flow:
• Chase up your slow-paying clients
• Offer a discount for prompt payment
• Factor out your invoices to a company specialising in this field

You also need to avoid excessive investment in fixed assets and stock as this will lead to a shortage of working capital. This is probably the biggest cause of company failures in New Zealand with many starting out under-capitalised. Most companies fail in the first two years of operation with only a mere 25% lasting beyond this point. Often this is because the initial capital was spent on fixed assets leaving an inadequate amount of working capital.