Free cashflow is imperative for a successful business. Unfortunately, too many small businesses don’t have sufficient funding and this can be catastrophic.
Cashflow is the lifeblood of the business. The difficulty can be in knowing exactly how much you really have available to spend.
Bills for payment fall into a few different categories:
- Those that are paid monthly like rent, telephone, wages for staff (although these could be paid weekly or fortnightly).
- Those that are paid quarterly like GST, PAYG Withholding (tax deducted from staff wages), superannuation contributions.
- Those that are paid annually like income tax (although you may have to pay quarterly instalments too).
I recommend that you maintain separate bank accounts for each of these different categories of bills.
The first step is to identify what your regular monthly bills are. This amount needs to be set aside so that you can pay those bills when they are due.
The second step is to calculate how much your quarterly bills are and then dividing that number by 13 weeks, identify how much needs to be put aside every week to cover these bills. If your business is growing, you may need to calculate a percentage of revenue for this and put that aside each week rather than a set dollar amount.
The third step is to calculate your income tax liability as a percentage of revenue to put that amount aside each week.
At the end of the month, you will have had funds to pay the monthly bills, and have money in the other accounts to cover the quarterly and annual costs.
Hopefully, you will have surplus money in the income bank account. This is your Free Cash. It is not required to pay any of your commitments and you have the choice on how to spend it. You may put the funds into marketing, fund a new staff member, increase your Take Home and take a holiday or take the funds to invest. The choices are endless. The benefit is that it is Free Cashflow that gives you choices.
