Bean Blog

Cash Flow Management

The Ins and Outs of Cash Flow Management

April 28, 2021

“I Made A Profit…So Where’s My Money?”

Did you know that this is the most asked question that Accountants get from their clients?
Well, that and “Why do I have to pay so much tax”. (Don’t worry, we have an answer for that one too, which you can find here).

Follow The Money.

The fundamentals of cash flow is something we would have experienced as children handling our allowances. We’ll gain money when a product or service is sold and we’ll lose money to pay for services or products that we’ve used. Sure, we can sell more or buy less, but that doesn’t tell us how to manage the balance remaining in the bank account. This balance is called your “Net Cash Flow”, and knowing this number is our starting point if you want to know where your profit has gone. Suppose this number is positive – great! If not – give it time or let us guide you on ways you can look to improve this figure.

Value Your Time.

Sally owns a small family-run shop at her local shopping centre. She had a great trading day and managed to bank $1,000 worth of sales in cash and another $500 in store credit. But rent is also due to be paid today, and the landlord will be expecting to collect $1,200 by close of business. Sally only has today’s takings in her bank account, and her cash flow is looking pretty negative:

Sally’s Cash Flow:
Money In: Cash Sales $1,000
Money Out: Rent ($1,200)
Net Cash Flow ($200)

You’ll see that Revenue (or Total Sales) is not considered when calculating the Money In amount. Were this the case, Sally would have received $1,500 today and would have closed on a positive note of $300. For cash flow to have meaning, we can only count the physical cash on hand because Sally has not yet received the store credit of $500.

Luckily for Sally, the landlord was caught in traffic and postponed his collection meeting until the next day. When Sally woke up the following morning, she saw that some store credit customers had paid their accounts. She had received an additional inflow into her bank account. Let’s see if it’s enough to pay her expenses:

Sally’s Cash Flow:
Money In: Cash Sales $1,000
Money In: Store Credit Settled $300
Money Out: Rent ($1,200)
Net Cash Flow $100

Sally is now cash-flow positive, and she can pay her rent.
You can see how time plays a critical role in understanding your cash flow. Yesterday Sally was broke, but today she is net cash flow positive.

If I’m selling to you, I speak your language. If I’m buying, you speak my language.

Everyone is a customer and a supplier to someone. And how you manage these relationships significantly impacts your cash position. Let’s assume that Sally’s landlord allowed her terms of 60 days to pay her rent. Great! Suddenly she is cash-flush, and the fear of not being able to meet her commitments has disappeared… for now. All that we’ve done is to push the problem further into the future.

But what if it was the other way around, and Sally gave 60-day terms to her customers? Would she even have enough cash to continue to trade for the next two months until the store credit was settled? How would her landlord’s business be impacted when it didn’t have the cash inflow from Sally’s payment for the next two months? Would the landlord be able to settle his debts? Or without proper planning and budgeting, would both businesses simple run out of gas and stop trading?

Running Out of Gas.

I love this saying by Michael Dell, founder and CEO of Dell Technologies:
“We were always focused on our profit and loss statement. But cash flow was not a regularly discussed topic. It was as if we were driving along, watching only the speedometer, when in fact we were running out of gas.”

Whilst empty pockets have never held anyone back, a business will likely fail if the kitty runs dry. A great case study that’s still happening today is Elon Musk’s Tesla, Inc. While the company has never entirely run out of money, Musk has often admitted that they have come close to ceasing operations due to bankruptcy. “Closest we got was about a month,” he said when asked via Twitter how close Tesla got to defaulting. The issues that Musk and his team have are the same issues that we as business owners face. You’re not alone, so let’s do this together.

So Why Do We Care?

We care because we love seeing businesses have enough in their tank to get to the finish line. We do what we do because we believe that companies build livelihoods. Proper planning and budgeting is the best way to ensure the sustainability of your company. A professor of mine once described cash flow as a “bucket with holes at the bottom”. You can’t fill the bucket by pouring more water in the top; you’ll only increase the wastage size at the bottom. You need to do something about the leak if you hope to build up a reserve. Let Giles and Liew help you close those holes and find your money.

About Cameron Phillips

Cameron Phillips Senior AccountantCameron is an experienced and trusted Accountant, Advisor and business growth specialist with a passion for not only mastering accounts but also using the results to advise clients as to how to reach the next stage of business growth. With a relentless entrepreneurial mindset, he delights in strategic planning, accounting and inventory systems advisory and software implementation.

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