Do you know the difference between ‘cash flow’ and ‘budget’? Understanding what these terms mean can help you improve your finances and the financial management of your business.
‘Cash flow’ is basically the money moving in and out of your business.
When you are examining the revenue of your business, the first thing to analyse is the bank account balance – that is, the first line in any good cash flow. You should then attempt to estimate the expenses – that is, what you expect to move out of your business. Both the revenue and expenses position should be measured on a weekly or monthly basis. For example, your bank balance might be $200. You know that you are likely to receive $500 in revenue this month from your customers. You also know that in a certain number of weeks you will be paying wages or rent. That is your cash flow. Your bottom line is what you can then expect your available cash balance to be at the end of next month or next week.
A budget, on the other hand, is what you use to make decisions about whether you can afford something.
A budget is about examining what you would need to do if, for example, you wanted to employ somebody new. What do you need to do? You would evaluate the cash flow of your business and estimate your profit or loss margin. Your profit may sit at around $50. From there, you might conclude that it is necessary to increase your sales by a certain amount so that you can afford to employ somebody in two months. Setting a budget is a good way to track your business growth. This is something we already do naturally in our thinking. For instance, we know that there’s a certain amount of money coming into the household. Shopping, petrol and schooling may count as expenses.
This difference is important because while a profit and loss report may indicate that a business should be in a healthy position, the bank balance may in fact show that it is in a bad shape because of problems concerning cash flow.
Improve your business’ financial position by generating more cash flow in to your business.
How can you then generate more cash in your business? One important tip is to carefully and consistently examine the position of your debtors. Talk to them about charging late fees, or charging a little bit less if they were to pay on time or in advance. Another tip is to consider the structure of your business. Is it time to move out of being a sole trader? Should the business become a proprietary company or a family trust? Should you consider the concept of a partnership? These may have important ramifications for your cash flow and should be discussed with your accountant. This post is based on HerBusiness’ Small Business Finance Course, a three-part online course designed to arm small business owners with the skills to better manage their small business finances. For details of upcoming courses, call us on 1300 720 120 or visit the upcoming events page on our website.
