Recent atr Blog Posts

Simple Cash Flow

Cameron Taylor - Thursday, February 14, 2013

When trying to explain accounting entries to staff I always break things down to the simplest form. This is the easiest way to understand cash flow in your business. Cash flow is the single most important factor in keeping a business running well, with no cash its game over. Even the most profitable business can suffer from cash flow problems. How can that be ? The first thing to understand it that profit doesn't equal cash, things like loan repayments, GST, Income Tax Instalment and dont forget owners drawings all use vital cash resources but none of these are taken to be expenses when calculating profit. 

Lets imagine a simple scenario.

Joe decides to start a landscaping business. . He requires some tools and equipment which he acquires for $20,000. He purchases a vehicle on finance and pays the first monthly payment of $800. Places an adds in newspaper and radio which he pays $2,000 on credit card. Three weeks later he gets his enquiry, quotes the job and commences work. He purchases $10,000 in materials for the job and starts work. The job takes 3 weeks which in the meantime he has a vehicle loan payment to make. Once completed he invoices the client $20,000 and hopes to get paid in the next 30 days. In the meantime he get another job and forks out another $10,000 in materials for that job.

So he has made a good profit but is bleeding cash. This cash used to get things moving is what is known as working capital. The more working capital you need means less, or no money in your bank.

Most small business owners don't prepare detailed cash flow projections which means a cash crunch can hit them suddenly and unexpected. If you were a banker would you be more willing to help some one that calls saying help  I need money tomorrow for wages or someone who says according to my projection cash will get tight in a few months, could we talk about an extension on the overdraft.