Cash flow management
Most business operators realise cash flow is a necessary part of running a business but the timing can be quite difficult to control.
Two elements contribute to cash flow. Revenue, (money coming into the business, sales, interest, fees, dividends,owners contributions), and money going out of the business,( direct expenses like stock, raw materials, certain wages, indirect expenses, rent, utilities, consumables, government compliance, such as Taxes, GST, rates, stamp duty and owner’s drawings).
Depending on the nature of the business,these inflows and outflows can appear cash rich in one instance and seeming cash poor the next, making monitoring and managing cash flow almost impossible.
The First steps to managing cash flow and preventing debt
There is one simple way to help you manage your cash flow before Integra even looks at financial statements with cash analysis, profit and loss, balance sheets, debtors and creditors.
Set up specific business bank accounts for the dedicated to the running of the business. Most smaller businesses can manage a business bank account for the day to day receiving of funds and paying expenses to keep the business operating.
Some businesses want to have an overdraft facility or a business credit card but it is not always necessary, sometimes keeping it simple is the best.
Your business also needs a specific bank account for your compulsory compliance that needs to be paid periodically. This can be called the GST account.
Integra advises your 10% GST on income, your income tax withheld from employee wages, superannuation payments for employees, and even income tax instalments for yourself should be held in this account.
We strongly advise this method, so , when the activity statement is due, there is money to pay the ATO.
Removing these compliance expenses from the business bank account gives a truer representation of how much cash the business actually has in the bank for operations.
It highlights deficits, indicating changes in management or capital input when the bank balance is lower than expected.
If cash balance is high and your GST account is covering all compliance expenses it might mean assets can be purchased or owners may withdraw some cash that they had contributed the year before. Having a truer representation of actual cash helps control cash flow and aids in constructing business decisions based on a more accurate set of data.
The reward is staying disciplined and adhering to the strict, but simple allocation of funds to bank accounts. If cash flow is not flowing freely, it maybe time to look at a new or revised business strategies, or you may need to invest your efforts into something else entirely.
Integra Business Accountant