Your bank balance is not your cash flow

You’ve had a good month.
Sales revenue is up. You’re feeling positive about the business.
There’s money in your bank account.

And then you’re given the figure payable on your quarterly BAS. It’s significantly more than your available funds in the bank account. You push it aside for the moment because you’ve got time before you have to pay the BAS. In the middle of that night you wake up, wondering where you’re going to find the money to pay salaries and wages, let alone pay the BAS.

How did this happen, yet again?

The problem is that your bank balance tells you that you’ve been able to set aside surplus funds from past cash flow. The bank balance, however, doesn’t consider your future cash needs. It tells you what funds you have now, not what’s coming.

Your revenue is strong, and the business is profitable. Surely that must mean that you will have sufficient funds to meet your future cash outflows. How can you be cash-stressed?

Revenue and profitability are not the same as cash flow. For a start, revenue invoiced in the month is not the same as cash received. The cash from invoicing will be received at a future date, depending on your payment terms. In the meantime, many of the costs, particularly salaries and wages, have already been paid in the month. You’ve had cash outflows in the month, but the cash inflow from the invoicing will only be received later. This causes an immediate negative cash flow.

The timing of debtor collections has a significant impact on your cash position. Slow-paying clients are the most common day-to-day cash drain on a business, and more than a few otherwise healthy businesses have been caught out by it.

Growth always creates cash-stress. Many business owners don’t fully understand the impact that growth has on cash flow. As you grow, the outflow of cash relating to costs and expenses increases, but there’s a lag before the cash is received from the increased invoicing. Growth is, of course, a good thing, but you need to understand that it’s going to create increased cash needs, now and into the future. When you know the future funding needs, you can plan how you will deal with it. Without the visibility and clarity, planning becomes impossible.

Can you confidently answer these questions?

• Is the business generating sufficient cash to pay salaries and wages every week (or fortnight or month) for the next 12 weeks?

• Will I have sufficient funds available to meet my ATO BAS obligations when they fall due?

• My business revenue is growing. Growth always requires cash. What funding is required due to this growth, when is the funding creating cash-stress and where will the funding come from?

Lack of visibility into your cash needs is a common problem, and business success depends on having these answers.

With cash visibility, your decisions are made with confidence.

Making a decision on hiring new staff or agreeing to a new contract becomes easier when you already know what your cash position will be in 90 days. And being able to see the impact of these decisions on your future cash leads to confident decisions.

Do you actually know what your cash position will be in 90 days?

If you'd like to map where the gaps are in your business specifically, our Financial Clarity Diagnostic is a good place to start. Thirty minutes, no obligation.