Plenty of small businesses that look profitable on paper still run short of money. Customers pay late, a tax bill lands or a big order needs stock bought upfront. Cash flow is simply the money going in and out of the business. Planning for it ahead of time is one of the most useful habits an owner can build.
This guide covers how to put together a cash flow forecast and a simple budget. It draws on guidance from the Australian Taxation Office (ATO) and Business Victoria. The steps suit online businesses as well as those with a shopfront.
Why cash flow matters
The ATO describes cash flow as the amount of money that goes in and out of your business. Having enough cash on hand helps you pay bills and meet your tax, superannuation and employer obligations. Business Victoria calls cash flow the fuel that keeps a business running. It also warns that running out of cash could end the business.
Negative cash flow means more money is leaving the business than coming in. Business Victoria notes this can come from outside factors, sales trends or changes in operating costs. Good control of cash flow helps you pay bills on time and spend less time chasing customers. It also leaves money aside to grow the business.
What a cash flow forecast does
A cash flow forecast estimates the cash you expect to receive and spend over a set period. Business Victoria suggests preparing one for the year ahead as an early warning system. It shows you when more cash is going out of the business than in. That gives you time to act before a shortfall turns into missed payments.
The ATO calls a cash flow budget or projection the best way to make sure you have enough cash available. It says a budget helps you see your likely cash position and spot fluctuations that could cause shortages. It also helps you plan tax payments and major expenses. A budget can give lenders more information about the business as well.
Building your forecast
Start by choosing a period. The ATO suggests working out your cash flow budget monthly, quarterly or yearly. A twelve month view broken into months matches the Business Victoria advice to forecast the year ahead and track cash monthly. A spreadsheet or accounting software is enough to get started.
Free templates are available from government sources. Business Victoria offers a cash flow forecasting template in Excel that recalculates as you enter figures. The Small Business Development Corporation in Western Australia has a cash flow forecast calculator as well. Both help you set out projected income and expenses in one place.
Listing your costs
List every cost the business is likely to face in the period. The ATO says to include fixed costs and expected variable costs. Its examples cover rent, insurance, utilities, advertising, internet, wages and equipment. Tax items such as PAYG instalments and GST belong on the list too.
Estimating your income
Income is harder to predict, especially for a new business. The ATO suggests estimating it if you are starting out and updating the figure as you go. Once you are established, you will have a better idea of what to expect. The ATO also notes that being more conservative with this amount may give you some flexibility.
Keep the forecast up to date
A forecast only helps if you keep using it. In the ATO’s words, a cash flow budget is not set and forget. Monitor it, update it as your situation changes and watch for big gaps between budgeted and actual amounts. Business Victoria also suggests comparing your actual cash position with the forecast regularly and dealing with problems promptly.
Testing a few scenarios adds another layer of protection. Business Victoria recommends running what if scenarios, such as a drop in sales, to see how your cash flow would cope. You might also model a large customer paying late or a supplier raising prices. Each scenario shows how much buffer you need to keep in the bank.
Practical ways to improve cash flow
Your forecast will often point to gaps that need fixing. Business Victoria lists a range of practical steps in its guide to improving your cash flow, and some of the simplest are below. Most of them cost little to put in place.
- Invoice as soon as a job is complete or products are ready for delivery.
- Review payment terms, which do not always need to be 30 days.
- Ask for a deposit and progress payments on large or special orders.
- Use the full payment terms your suppliers offer.
- Keep separate bank accounts for business and personal use, plus one for compliance payments.
Stock is another place where cash gets tied up. Business Victoria suggests keeping only the stock you need to serve customers and clearing old or slow selling lines. Setting clear processes for when to reorder helps as well. If you sell physical products online, freight costs and timing matter too, which is where logistics brokers can come into the picture.
Spending on marketing with cash flow in mind
Marketing brings in sales, but it is also a regular cost that belongs in your budget. Business Victoria suggests tracking where customers come from and stopping spend on tools that are not working. It also recommends a website and social media with a clear call to action, kept updated on a set schedule. Following up every enquiry is another of its suggestions.
For online businesses, the website is usually the main sales channel. Regular work on optimising your WordPress website can be planned into the budget like any other expense. Free guidance such as advice about SEO direct from Google helps you spend wisely on search. Reading about a day in the life of web designers also gives a sense of how much time site updates can take.
Getting help with your numbers
You do not have to build a forecast alone. Business Victoria notes that a bookkeeper or accountant can review your sales cycle, stock turnover and credit terms with suppliers and customers. The ATO page on how to manage your business cash flow also links to its record keeping guidance. Regular attention to record keeping and reporting, the ATO says, will help you manage cash flow better.
Frequently asked questions
What is the difference between a budget and a cash flow forecast?
A budget sets out the income and costs you plan for over a period. A cash flow forecast focuses on when cash will actually come in and go out. The ATO treats a cash flow budget or projection as the best way to check you will have enough cash available.
How often should I update my cash flow forecast?
The ATO says a cash flow budget is not set and forget. Update it as your situation changes and compare it against actual results. Business Victoria suggests tracking cash in and out each month.
What costs should I include?
Include fixed costs and expected variable costs. The ATO lists examples such as rent, insurance, utilities, advertising, internet, wages and equipment. PAYG instalments and GST should be included too.
Where can I find a free cash flow template?
Business Victoria offers a free cash flow forecasting template in Excel. The Small Business Development Corporation in Western Australia has a cash flow forecast calculator. Both can be downloaded from their websites.
This article is general information only and is not financial or tax advice. Speak with an accountant or registered tax agent about your own business.
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