10 July 2023

In an economic landscape that has battered countless businesses, one crucial factor common to businesses that are successfully navigating the current conditions is cashflow management.

Cashflow is the lifeblood that provides stability to your business, enabling it to settle debts, pay expenses on time, and fuel reinvestment. It’s your buffer against the storm – imagine a steady stream of income providing a fort of protection from future financial challenges and enabling your business to thrive amongst the chaos. It's not a pipe dream; it's cashflow management.

Cashflow reports make it easier to gain a deeper understanding of your business’ cashflow and profitability. When you have reliable reports, you can make better business decisions for cost savings and improve performance in challenging marketing conditions.

• This article will focus on:

• Understanding cashflow reports

• Identifying cashflow patterns

• Utilising cashflow reports for better decision-making

• How cashflow management can be improved

So, let’s dive in to discover invaluable cashflow management tips that you can implement to help navigate these challenging times.

The power of cashflow management

Cashflow reports make it possible to explore the movement of funds in and out of your business. Positive cashflow shows that you have more cash coming in than going out. Meanwhile, negative cashflow means that there's more cash flowing out, which can signal problems with the overall health of your business.

Cashflow statements allow you to understand not only the profitability of your company but also the long-term outlook. More importantly, looking at the reports frequently allow you to address problems early on. Otherwise, problems can quickly compound, causing you to have liquidity issues.

Cashflow statements have to be carefully analysed so that you can understand the overall flow – the revenue (inflow) and the expenses (outflow).

• The inflow includes cash that is made through your operations, investment, and financing. The sum is also referred to as net cashflow.

• The outflow includes cash that is paid as a result of operating your business as well as any debts that you have to pay regularly. This includes operating expenses, supplies, payroll, and more.

Beyond the basic inflow and outflow, you'll also want to analyse the statements to learn about operating activities and anything that can have a negative impact on your cashflow.

With deeper analysis, you can also explore investing activities (or opportunities for such) as well as financing activities to help you find the various things that will allow for business growth.

As you start to understand more about your cashflow statements, you can embrace the benefits:

• Identify cashflow gaps

• Identify liquidity risks

• Assess profitability

• Learn about operational efficiency

• Understand the relationship between revenue, expenses, and cashflow

As you start to make observations about what happens from month to month, you can start to look into ways to make improvements. Especially if you find that there is a significant issue with accounts payable or accounts receivable, you can improve upon and streamline certain processes.

Analysing cashflow statements

You'll want to analyse the various elements of the cashflow statement carefully to understand how the cash is generated and spent.

Your cashflow from operations will include net income from product sales or services.

Your cashflow from investing may include investment gains and losses as well as cash that you spent on property and equipment as this is part of the overall liquidity of your business.

Your cashflow from financing is the final segment and explores the cash that flows between you, owners, and creditors. You'll either have debt or equity – or a combination of it all. You'll likely report this information to your shareholders every year.

As you analyse your cashflow statement, there are also ratios to familiarise yourself with. This will help you to understand how well you're doing as a company. These can also signal that your company is in financial distress.

The cashflow from operations ratio measures the number of times you could pay off your current debts with the cash you generate within the same period. These help you to explore your current liabilities – and the outcome should be at least 1. Anything lower shows that you're unable to address current liabilities given your current cashflow.

The cashflow coverage ratio is another measurement, but it looks at your net income in its ability to cover debt payments. Essentially, this allows you to explore your company's ability to pay interest payments. Particularly if you plan on taking out a new loan, you'll want to establish this ratio.

There's also the cashflow-to-debt ratio that looks at your cashflow against your total debt. This makes it easier to see how long it would take to repay your debt if you dedicated all cashflow to paying off your debt. This allows you to understand your liquidity more effectively and ensure that you have a sufficient plan for the future of your company.

The ratios should be used as benchmarks so that you can have a comparative analysis month over month and year over year. Trend analysis should be performed regularly, too, so you can see how the ratios change from season to season.

Unmasking cashflow patterns for effective business planning

The cashflow that you have may follow different patterns based on what's going on with your business – product launches, holidays specific to your industry, and more.

By identifying patterns, you can also address the challenges that your business may face.

There are three common cashflow patterns that you'll want to familiarise yourself with:

1. Positive cashflow

   Positive cashflow shows that you have more revenue than expenses. While this is a good thing, you need to plan on how to deal with the added cash, including exploring ways to invest.

2. Negative cashflow

   Negative cashflow often means that there's a spending problem. Learning how to address your spending will help you to improve your business for the long-term.

3. Seasonal fluctuations

   You may find that one season is better than another due to weather, holidays, or something else. Knowing about the seasonality of your revenue and spending will allow you to plan more effectively so that you can hold onto your cash even when there are negative cashflow months.

How cashflow management informs better decision-making

Cashflow reports can show you where cash is already forecasted and whether you’ve already committed the extra money elsewhere. Additionally, you can look at when and where the money is coming in, which is particularly critical when there are cashflow gaps.

Virtually every decision you make will have an impact, either positive or negative, on cashflow. Your goal is to get in the habit of turning to the cashflow reports before making a decision.

When you're faced with a decision that impacts the financial health of your business, consider:

• Evaluating revenue streams

• Calculating profit margins

By doing this, you can make more effective decisions. You can control the expenses and optimise a cost structure so that your decision doesn't come back to haunt you.

Particularly when you're making a decision about a new project or investment, you'll want to set a cashflow target and monitor the progress. That way, you can determine if it was a good financial decision. If it consistently misses the target or you're not making the necessary financial progress, you can ditch the project and recover as much as possible financially.

Remember that not all decisions are going to be good decisions, even after you've done your research. Knowing when (and why) to scrap a project can be what helps you to stay financially afloat, even in uncertain economic times.

How to address cashflow challenges

It's not uncommon to have cashflow challenges. Some of the more common challenges our accounting and business advisory team see include:

• Having to delay customer payments

• Experiencing high operating expenses

• Not having enough working capital

• Navigating excessive debt burdens

• Difficulty meeting ATO obligations

If your business is experiencing any of these challenges, it’s likely you have a cashflow management problem. What you do about it will determine your ability to navigate the current economic storm as well as future ones.

By establishing cashflow management strategies, you can overcome these challenges so that they don't hinder your business.

For example, you can explore ways to get your customers to pay faster, even with incentives to pay within a certain number of days after invoicing. By getting cash faster, you can prevent delaying payments that you have to make.

As for having working capital, there are plenty of ways to finance your needs with short-term loans, corporate credit cards, and more. Much of it depends on your overall cashflow and your future projections to determine what you can afford now and in the future. It's also why cashflow reports are critical – they can help with the important financial decision-making.

Prioritising cashflow management in your business

While there are many cashflow management strategies that can be implemented, it comes down to choosing one that works for your business model and using it to refocus your decision making around cashflow and how you manage it.

Regardless of the size of your business, using cashflow management software to automate the entire cashflow management system is critical as it will give you access to financial reports and cashflow reports to inform your decision making, helping your business to survive even the toughest of market conditions.

It’s also important to recognise that you don't have to handle everything by yourself. Successful business owners don’t get there on their own – they know when to turn to professional advisers. A Virtual CFO can help ensure you have thought of everything and have someone to turn to when you have questions about cashflow reporting and performance.

If you’re not quite ready for the services of an outsourced CFO but need a better view of your financial situation, Findex can support your business with automated and templated financial reports backed by a responsive customer success team.

Download your complimentary sample reports to see the type of financial reports we can help you create, including a sample cash flow forecast produced by our forecasting tool and a sample dashboard report that provides an instant snapshot of business performance. For Franchises, not-for-profits, and industry specialists, we’ve included sample reports of how we can help you aggregate, rank, and benchmark.

The views and opinions expressed in this article are those of the author/s and do not necessarily reflect the thought or position of Findex Group Limited.