Our top three cash flow management techniques for your business

We’ve put together a list of three practical and effective cash flow management techniques to help protect your business from income disruptions.

Cash flow management technique #1: Split your accounts

Splitting your bank accounts is the easiest way to understand how to manage your cash flow (Need a refresher on what cash flow is, and how it differs from a budget? Find more information here).

For most businesses, an income account, a future liabilities account and a regular expenses account is all you need to gain cash flow control. Having these three accounts means you can see what your business’ incomings and outgoings are at any point in time.

Your income account is exactly what it sounds like – it’s where any money coming into your business goes. Your regular expenses account is where you’ll put money aside for paying invoices, bills, wages and other incidental expenses, and your future liabilities account is where you’ll allocate money to pay your tax and GST, PAYG and superannuation.

Cash flow management technique #2: Delegate, delegate, delegate

One of the best cash flow management techniques we have for small businesses trying to maintain cash flow control is to delegate their revenue as SOON as cash lands in your income account – seriously, do this every week.

Delegating like this means your expenses and liabilities are always covered. This is where cash flow forecasting comes into play – this cash flow management technique is an extension of your business budget (you can learn more about that here).

When you make a sale or receive payment for a service, transfer the portion that you need to cover your tax on your revenue, as well as GST, into your future liabilities account.
Keep in mind that the amount of tax each business/industry pays is very different. To effectively manage your cash flow, work out a tax estimate and thus know what percentage to transfer to your future liabilities account from each payment you receive.

Good to know: If your business charges GST, whenever you receive payments you could transfer the GST component to your future liabilities account. However, because businesses pay GST on their expenses, it often isn’t necessary to put aside the full 10% of your revenue into your future liabilities account. The key here is to ensure you’re completely covered: don’t rely on a refund of GST on your expenses. Some businesses will have a clearer idea than others of how their GST on revenue and GST on expenses will net out at the end of the year. Putting aside the full GST component of your revenue is the most conservative cash flow management technique, but we can help you figure out what’s best for your situation.

Similarly, every time you pay wages, transfer the PAYG and superannuation component to your future liabilities account. When the time comes to pay these liabilities, your account should balance (accountants call this netting out if you want to get technical), as you’ve put aside the exact amount that you owe. In theory, you’re left with no liability.  

Depending on your industry, you’ll have a different mix of expenses, but regardless of payment terms, every week you should be delegating money from your income account to your regular expenses account to pay quarterly bills or invoices as they land in your inbox.

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Cash flow management technique #3: Keep It Simple spreadsheets

There's no denying it, we love our tech (one of our favourite things about Xero is how well-connected it is to other apps), but when a business needs effective cash flow management, we aim to keep it simple. This is one scenario where a spreadsheet (whether it’s Excel or Google Sheets) is still relevant and recommended.

When helping clients get on top of their cash flow, we set up a smart business cash flow spreadsheet that models projected cash flow, and customise it to include business-specific features.

We make sure that these cash flow models are simple set-ups that can be managed on an ongoing basis by clients, because while we’re always happy to provide ongoing support, we think it’s really important that every business understands their cash flow. Frankly, managing cash flow is make or break, no matter your size.

For most businesses, we like to set up a cloud-based spreadsheet model: you get all the benefits of being on the cloud, but it is an extremely simple cash flow management technique, no matter your tech skills.

Why is cash flow management important to your business?

You might be wondering what the importance of cash flow management is in the first place. And we get it, staying on top of your incomings and outgoings can be tough if you haven’t implemented a solid foundation of cash flow management techniques from the outset.

So why is cash flow management so important? Put simply, cash flow is the money landing in your bank account from revenue, then going out when you pay for expenses.

All businesses are vulnerable to failure if cash flow is managed poorly. Think about what would happen to your business if you didn’t have enough money to pay your lenders and suppliers.

Ready to achieve cash flow control?  

Every business needs cash to survive (and thrive). Whether your business is in a slump, or you simply need more cash in order to grow, our experienced business advisers can work with you to introduce simple but effective systems that will improve the visibility of your incomings and outgoings, and improve your cash flow management techniques.

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