Cash flow management is a critical tool for managing your business well. A cash flow projection or budget is the best way to make sure you will have enough cash available to pay expenses, loans, taxes and to purchase new assets. This will help you see your likely cash position at any time, including:
- Identifying regular fluctuation that may lead to potential cash shortages.
- Providing insight into your spending activities.
- Assisting with short term planning.
- Crisis management – making sure there are no surprises in your cash flow.
- Identifying how much you can safely take out of the business.
- Investing surplus cash.
- Arranging loans.
- Putting aside funds for upcoming payments.
- Minimizing the element of uncertainty and guesswork.
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, 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, the P & L business expense will look like this:
| Wages: | $10,000 |
| Superannuation: | $1,000 |
| Total | $11,000 |
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 |
| 25 August | IAS lodgement – employee tax withheld paid to ATO | $3,000 |
| 10th October | Pay employee superannuation | $1,000 |
| Total | $11,000 |
In this example, a good cash flow budget will recognise that $3,000 cash will be needed in August and $1,000 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.
Happily, most dental practices should not have too many issues with customer payments outstanding, although customers paying on account represent business income not yet received in cash. Many practices pay their main suppliers on statement at the end of the month – so this is a predictable large cash outflow. While wages, supplies and income may fluctuate, some items will not.
How to Construct a Cash Flow Statement
Start by looking at past cash flow. Your accountant or bookkeeper should be able to assist with 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 normally predictable, as BAS, loan repayments and superannuation are all on set dates throughout the year.
Using the Information in Your Cash Flow Statement
Ensuring money is available for upcoming obligations is the obvious use for a cash flow statement. If your cash flow statement shows a shortfall in cash, analyse why that might be.
Is it short term – for example 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?
Having a good understanding of your cash flow requirements will reduce stress, minimise those unpleasant payment surprises and put you in charge so you can make those business decisions with confidence.
By Joanne Crumpton, Bookkeeper and Director of ECJ Online
This article first appeared in The News Bulletin, August 2021, published by the Australian Dental Association.