Here’s how to understand your Cashflow and Funding
By Robert Prior
So, now that you have improved your business’ profitability and you are running a positive bottom line (refer to the Lincolns Newsletter - Edition 134), let’s talk about cashflow and funding.
Did you know that you can run a highly profitable business but have no spare cash OR you could run a low profit business yet have lots of spare cash. As always life is about balance. So, let’s start with the basics…
What is cashflow?
“Cashflow” is simply the net dollars coming in and out over a period of time. Cashflow determines your ability to pay your bills (on time) and invest in growth. To improve your cashflow, you simply need to have more money coming in than you have going out!
What is funding?
“Funding” is where those cash inflows come from. Understanding the timing of both cashflow and funding is crucial to the sustainability of your business, so it’s very important that you understand these!
Some factors that affect cashflow
Delays in issuing your invoices.
High debt levels.
Increasing interest rates.
Unfavourable payment terms.
Inefficient inventory management.
Rapid business growth.
Tax debts (particularly for new businesses, after their initial “tax-free holiday” period).
Poor spending habits.
Did you know…
Only one third of your cashflow story comes from your operating activities. The other two thirds that you need to understand and plan for are your investing activities (including plant and equipment purchase/sales) and financing activities (including loans and repayments).
Budgeting plays a key role in this. One tool you could use to assist you with your budgeting is a Three-Way Forecast.
“What’s a three-way forecast,” you say?
A three-way forecast is a combination of three linked reports: Profit & Loss, Balance Sheet, and Cashflow. It shows you the impact of changes in your Income and Expenses (Profit and Loss) as well as changes in your Assets and Liabilities (Balance Sheet) on your future likely Cashflow and overall financial position.
Using a three-way forecast can help you to:
Predict future potential outcomes and avoid unforeseen consequences.
Identify peak debt, overdraft or future loan requirements.
Assist with bank finance applications.
Assist with completing a viability analysis for any potential new business purchase.
Consider the impact of any potential new business lines/ideas/scenarios.
Plan for any large tax bills coming up (including BAS and PAYG Instalments).
Negotiate payment arrangements with the tax office, if required.
You can create a three-way forecast manually using spreadsheets, or automatically using specific budgeting software such as Castaway or Calxa. We have cashflow templates which we are happy to share with you. These templates are designed to help you better manage and understand your cashflow, providing a clear picture of your financial health.
If you’re already preparing a Profit and Loss Budget each year, that’s a great start – but it’s only telling you a third of the story.
Some alternative options for Finance
Aside from the typical bank loan, overdraft facility or equipment finance, some banks have alternative ways to provide you finance to help operate your business, including:
Debtor Financing: Rather than waiting for your customers to pay you as normal, you could potentially access up to 85% of the value of your debtors up front, by effectively “selling” a portion of your unpaid invoices to the bank.
Trade Finance: Short-term working capital funding to support your domestic or international transactions to assist you bridge the funding gap between purchasing stock and receipt from sales to your customers.
Having a good long-term relationship and communication with your bank manager is important for your business success. If you don’t already have a good bank manager assisting you, then please get in touch with us as we have many good contacts that we’re happy to share. We can discuss your situation and make arrangements for you to meet with someone perhaps more suitable for you and your business to assist you now and long into the future.
Conclusion
Understanding and managing your cashflow is crucial to the success and longevity of your business. Using a three-way forecast can assist you gain a clear picture of your likely future financial health and make informed decisions. Remember, a healthy cashflow is key to a successful business!
Enter our Selfie Competition
Where is it? On the Naked Bean Coffee building, Town side.
242 Middleton Rd, Mira Mar
Snap a selfie with our billboard!
The picture with the most likes will WIN A SUPER AMAZING PRIZE
(Naked Bean $30 Voucher).
Competition closes Tuesday 30 April 2024.
Winner Announced Thursday 2 May 2024.
A Coffee With… Touchwood Mushrooms
Rob & Michelle visited Graham & Lee Upson at their mushroom farm in Denmark, to have a chat over coffee and find out all about their journey into medicinal mushrooms.
