In the current economic landscape, marked by factors such as rising interest rates, the importance of cash flow management for your business cannot be overstated. By leveraging cash flow projections, you can ensure sufficient money to cover essential expenses, loan repayments, taxes, and to invest in new assets. This proactive approach empowers you to evaluate your cash position at any time, including:
• Identifying recurring fluctuation that may lead to potential cash shortages.
• Providing insight into your spending habits.
• Assisting with short term planning.
• Crisis management – making sure there are no surprises in your cash flow.
• Determining a safe amount to withdraw from the business.
• Investing surplus cash.
• Arranging loans.
• Setting aside funds for upcoming payments.
• Minimizing the level of uncertainty and conjecture.
What is a Cash Flow Statement?
A Cash Flow Statement is simply a record of the cash moving into and out of your business. Cash flow relates back to how much cash is sitting in your bank account at any point in time. ‘Cash flow in’ is the money coming into the bank account from customers, rent, GST (Goods and Service Tax) refunds, and ‘cash flow out’ is for expenses, wages, taxes, loan repayments and BAS (Business Activity Statements).
What is the Difference Between Cash Flow and Profit & Loss (P & L)
A Profit & Loss Statement measures income from customers and shows expenses such as wages, superannuation (which is increasing to 11% from 1st July 2023), purchase of supplies, bills, rent and so on. The net figure is your profit.
It is perfectly possibly for a business to be showing a profit and yet there is no cash in the bank.
There are 2 main differences between the P & L and a Cash Flow Statement:
- Included items: the P & L does not include some items which will affect your cash flow, such as the GST amounts, loan repayments and withdrawals made by the business owner for living expenses.
- Timing differences: the P & L recognises an expense or income when it is incurred but does not tell you when the money is received or is due to be paid.
As an example, if a business pays staff wages on 1st July 2023, the P & L business expense will look like this:
| Wages: | $10,000 |
| Superannuation at 11%: | $Â 1,100 |
| Total | $11,100 |
However, this is not the same as the cash coming out of the bank. For this transaction, the cash flow projection would look like this:
| 1 July | Net wages paid from bank | $ 7,000 |
| 21 August | IAS lodgement – employee tax withheld paid to ATO | $ 3,000 |
| 10 October | Pay employee superannuation | $ 1,100 |
| Total | $11,100 |
In this example, a good cash flow budget will recognise that $3,000 cash will be needed in August and $1,100 needed in October. A good cash flow projection would predict those payments coming up. Similarly, GST is collected and spent, but it is only when the BAS is lodged that the net GST is a cash refund or payment to your bank account.
Fortunately, most dental practices experience few issues when it comes to outstanding customer payments. Nonetheless, it’s important to recognise that income derived from customers paying on account represents cash yet to be received. Many practices follow a monthly statement-based payment arrangement with their primary suppliers, leading to a predictable and significant cash outflow. While wages, supplies, and income may vary, certain outgoings will remain unchanged.
How to Construct a Cash Flow Statement
Begin by looking at your past cash flow. Your accountant or bookkeeper should be able to provide this information.
Then, use this as a template to predict those elements which will fluctuate, such as income, wages, cost of supplies, and any planned large expenditures or new loans. As with a budget, you can prepare a couple of scenarios – best case scenario and worst case scenario – if you are using the cash flow statement for making decisions about the business.
The timing of the payments is typically consistent, as BAS, loan repayments and superannuation all occur on set dates throughout the year.
Using the Information in Your Cash Flow Statement
A cash flow statement can help to ensure funds are available for upcoming obligations. If a shortfall is indicated, analyse why this may be the case.
In the short term, for example, a cash flow statement can help you to answer the following questions:
• Are you paying for laboratory fees which will be recovered within the month?
• Are you buying more supplies than you are using?
• Would it be simpler to pay superannuation monthly rather than quarterly so the amount does not build up?
• Can you afford a new loan repayment?
• Should you hire more staff?
• When will you need money to pay your BAS or your income tax?
Establishing a firm understanding of your cash flow needs will alleviate stress, minimise those unpleasant payment surprises, and empower you to assume control, allowing you to confidently make business decisions.
By Joanne Crumpton (Principal Consultant and Bookkeeper) & Aine O’Malley (Director and Bookkeeper) of ECJ Online, digital bookkeeping and payroll service.
This article first appeared in the August 2023 issues of the News Bulletin, published by the Australian Dental Association https://www.ada.org.au/Dental-Professionals/Publications/News-Bulletin