Cash Flow & Budget Planning

Often, clients come to us at Vault because they’re busy and making a lot of money, but still can’t pay the bills or meet their IAS or BAS obligations. We tell them that the problem isn’t revenue – it’s cash flow. Basically, cash flow is the money going in and out of the business. It’s not about how profitable you are or how much revenue you’re making. It’s about how much you actually have at any moment. You may have many customer invoices out there waiting to be paid, but they won’t help you pay supplier invoices today if there’s no cash in the bank. Bad cash flow management can do more damage to your business than any other issue. But we can usually fix our clients’ issues by implementing some simple cash flow planning. Read our advice on how to plan for and manage cash flow as part of your bookkeeping.


How Cash Flow Planning Helps

Cash flow planning helps ensure you’ll have enough cash in future to pay bills, BAS and IAS obligations, and employees.It’s not foolproof – because it’s difficult to predict what customers will do in the long term – but it will help you in the short term.

Cash flow planning has many benefits for your business:

  • You can accurately estimate how much money will flow out of your business.
  • You are more aware of your business’s usual deposits and withdrawals.
  • You can better predict how much cash will flow in from sales.
  • You can more confidently decide where and when to spend money, like new staff.
  • Your business will be more financially stable with better planning and management.
  • You can adjust your pricing to bring in the cash you need for expenses.
  • You can adjust your expenses where necessary to find cheaper options.
  • You can better manage your inventory so you don’t invest unnecessarily.
  • You can determine the best time to repay debts and increase your cash reserves.

There are many great reasons to create and use a cash flow plan in your business. Let’s look at how to do that.


Creating A Cash Flow Plan

Cash flow planning sounds complex but it’s actually just a few simple steps:

  • Step 1: Identify your goals – Decide how far out you want to plan for. If your business is new, perhaps just two or three months. A useful cash flow plan tells you what’s going in and out over 90 days.
  • Step 2: List the monthly expenses that take cash from the business – This might include rent, insurance, payroll, loan repayments, advertising and tax payments. Many expenses are the same each month, but add any one-off expenses too.
  • Step 3: List the cash that will come into the business – This might be sales, money from investors or tax refunds. Use previous sales reports to estimate upcoming sales.

Once you know what cash will flow in and out of the business, you can work out your monthly cash flow:

Incoming money – outgoing money = positive or negative cash flow

If you always have negative cash flow, your business could be in financial trouble. Use this information to start improving your cash flow situation before it’s too late.


Tips For Cash Flow Planning

As you get more experienced at creating cash flow plans, you’ll get better and more in-depth information from them. And your business’s financial management will get better and better.

This is where accurate and up-to-date bookkeeping is worth its weight in gold:

  • Use previous cash flow statements from your bookkeeping system and bank records to create your cash flow plan.
  • Use your balance sheet and income statement for more in-depth analysis.
  • Consider any seasonal variations when predicting incoming cash flow.
  • Be prepared for late payments. Unfortunately cash flow planning can’t stop customers paying you late.

Xero is our preferred accounting system at Vault, and it contains several features to help you track your cash flow. Read this great advice from Xero about keeping cash flow up to date.

Vault Business Advisors is now The Accountants