Cash flow will make or break your small business
A cash flow statement shows the ins and outs of your business in real-time. Cash flow is the food and water for your small business and is critical for success. Profitable small businesses fail every day in Australia because they run out of cash.
Take a look at John’s business for example:
John’s gym equipment business is going gang-busters. John makes the top quality gym equipment himself right here in his Australian workshop. Business is booming and John is on his way to a year of record profits.
John has a great bookkeeper, and his books are up to date. He has enough cash flow for his usual ins and outs. A huge order comes through from John’s biggest client, GymBoss. John’s not worried about the extra material he has to put on credit because he has plenty of cash for the month and a whopping amount of cash to come in from this new contract.
John orders all the materials he needs and gets to work. 30 days pass and GymBoss adds to the order but is yet to make a payment. It’s a regular client that usually pays on time and John doesn’t want to lose the contract. John orders more supplies on credit and continues to churn out equipment for GymBoss. The debt quickly goes from 60 to 90 and then 12O days. GymBoss assures John that he will be paid in full but after 6 months, GymBoss still hasn’t paid and John’s gym business is forced into liquidation.
Cash flow lessons:
- No matter how much you trust your clients, credit should never go beyond a 30-day term.
- Never have more than 15% of your business income come from one source.
- Always have enough cash to pay your bills at term.
Managing your cash flow will make or break your business. Ask your accountant to create a cash flow statement for your business and meet regularly to go over the figures, compare estimates against actual amounts, discuss recommendations to improve cash flow and ensure your business has enough cash to keep going.