Cashflow Management

What are the 5 principles of cash flow?

Cash is king! Cash is the lifeblood of any business. Without cash the business won’t survive, even the most profitable business can fail because of poor cash flow.

  • Without cash your business will not survive
  • Understand your key cash flow drivers
  • Managing your cashflow is all about your processes
  • Treating the symptoms of poor cashflow without fixing the underlying causes is time consuming and frustrating
  • Be prepared to make process changes

It’s interesting we often think profit equals cash, but this is not always the case. When a business is growing fast, in startup mode it needs working capital to fund that growth and that’s why it is called working capital because the share capital has to work hard because the business is having to pay for fund, stock, payroll and all sorts of things. The fact the business is making profit on paper and yet cash is tight is precisely why every business owner needs to understand their cash flow drivers. We need to look at the processes behind cash flow, how do we pay people, how do we get paid? It’s no longer about the sale it’s about banking the sale.


What would be an example of some of those processes?

Process of sending out invoices at the end of the month with a due date ‘please pay us on the 20th July’. How about we change that process to let’s send out our invoices weekly and change our terms to 7 days. Let’s put a process in terms of how we follow up people, the reminders we send. All of those things will change our cash flow, but they are processes that we are changing. Automation, software such as Xero can really help with this, but often a key process can be that phone call to follow up and ensure payment.


What is the difference between profit and cash?

What is profit? Profit = total sales – cost of goods and all the expenses that go into making a business.
What is cash? Cash is all cash that goes in and all the cash that goes out.

Now when you’re looking at the statement of financial performance or what we used to call profit and loss statement you will see certain items like sales, interest etc but you won’t see other things in there like a car or a new computer.

GST. That is not in your P&L, it comes out of your bank account but all our profit and loss items are done excluding GST. Loan repayments, is that in the profit and loss? A proportion of a loan repayment that’s called the interest but the principal which is the bit that pays down the loan isn’t. So, on the one hand we’ve got part of the loan payment being in the profit and loss and coming out of the bank account and I’ve got the other part which is the repayment of the capital not going in the profit and loss but still coming out of the bank account. As I said before cash spent on assets doesn’t go on the profit and loss, but it does come out of the bank account, likewise cash that we receive from selling assets does go into the bank account.

Depreciation – it’s a strange one! We know it doesn’t come out of the bank account because it’s a non-cash entry and it does affect the profit and loss. Let’s say we have bought an asset for a$100 and we depreciate it for $10 a year for 5 years, then it’s worth $50. At the end of the fifth year, we decided we needed to go and get another one and that was going to cost us a $100 again. That $100 that we are now spending is the value of the asset at $50 plus all the depreciation we’ve just written off, so it sort of does get into our cash and sort of does get into our profit but it’s all about timing and that’s the difference between profit and cash. If you have a cash business, there is NO difference between profit and cash, so the only difference is the TIMING. We make a sale in a cash business? Straight in the bank account…. we make a sale in a non-cash business? We might get the cash 20/30 days later.

What is the working capital cycle?

In a nutshell, this is how long it takes to sell the inventory (Inventory Days) plus how long it takes to receive payment (Receivable Days) minus how long you have to pay your supplier (Payable Days) equals the length of your business’s Working Capital Cycle.

What is a cash conversion cycle and how do I calculate it?
The cash conversion cycle (CCC) – also known as the cash cycle – is a working capital metric which expresses how many days it takes a company to convert cash into inventory, and then back into cash via the sales process.

What are the 7 key causes of poor cash flow?


A poor accounts receivable process will result in debtor days (the time between billing and banking) being too high. This will stifle your cashflow. There are many strategies to minimise debtor days including tightening your Terms of Trade, offering prompt payment discounts and streamlining your billing process.


A review of all suppliers’ terms may identify ways to improve cashflow and potentially achieve better Terms of Trade. Implementing budgets, streamlining your payments process to maximise prompt payment discounts and avoid late payment penalties is just the start.


Carrying stock for too long means full shelves but an empty bank account. This is no different if you’re a service provider with work in progress that is yet to be billed. Reviewing your stock ordering systems and stock control processes (to name a few) will identify strategies to ensure cash hits the bank sooner.


Often significant cashflow and interest charge improvements can be achieved with a regular review of existing debt. Maybe your debt / capital structure could be improved, or perhaps your debt should be consolidated and paid off over a longer term. Maybe you need to review and adjust what you’re drawing from the business, or perhaps the business needs a capital injection to fund its growth.


Every business should do a thorough review of its overheads each year. Reviewing the effectiveness of your marketing spend, going paperless, putting expense budgets in place and changing your technology platform are some simple ways to reduce overheads.


Our gross profit margin is what is left from sales value after variable costs are deducted. There are a large number of strategies that you can implement to increase your margin, such as focusing on rework and wastage, reducing stock shrinkage and improving team productivity, just to name a few.


If the current sales levels don’t support overheads and other cash demands on the business, then the business is not currently viable. If in high growth mode, a financing plan will be necessary. If not, we need to consider how we will grow sales. To grow sales we need to focus on customer retention, generating leads, improving sales conversion, customer transaction frequency and pricing strategies.

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