Cash flow management

Why it matters

Cash problems compound. A late customer payment means a late supplier payment, which means a lost early-payment discount or a stopped delivery, which means a delayed job, which means another late invoice. Businesses with a clear view of cash can negotiate from strength, take on growth without panic and sleep at night. Those without it make expensive decisions in a hurry, like taking high-interest short-term finance or discounting heavily to pull cash forward.

Profit and cash are different things

Four things drive a wedge between the profit on your profit and loss statement and the cash in your bank. Timing: you invoice in March and get paid in May. Stock: money spent on inventory is an asset, not an expense, until it sells. Capital spending: a new vehicle hits the bank in full but hits the profit and loss slowly as depreciation. And money that was never yours: GST collected, PAYG withheld from wages and super owing all sit in your account looking like cash you can spend.

Growth makes this worse, not better. Doubling sales usually means doubling stock, doubling receivables and hiring ahead of revenue. Many businesses fail at their busiest, because the faster they grow the more cash they need to fund the gap.

Measure the cash conversion cycle

The cash conversion cycle is the number of days between paying for inputs and receiving payment from customers. It has three parts: how long stock sits before it sells (inventory days), how long customers take to pay (receivable days) and how long you take to pay suppliers (payable days). A shorter cycle means less cash tied up; a negative cycle, where customers pay you before you pay suppliers, means growth funds itself.

Each part is a lever. Reduce inventory days by ordering smaller quantities more often. Reduce receivable days by invoicing faster, taking deposits and chasing early. Extend payable days by negotiating terms, without damaging supplier relationships or missing discounts. A service business has no inventory, so the whole game is receivable days.

Forecast cash thirteen weeks ahead

A thirteen-week rolling cash forecast is the single most useful tool in small business finance. It is a simple spreadsheet: opening bank balance, expected receipts by week, expected payments by week, closing balance. Receipts come from invoices already issued (with realistic payment dates) plus confident sales. Payments include wages, rent, suppliers, loan repayments, BAS, super and your own drawings.

Update it every week by replacing the forecast with what actually happened and adding a new week at the end. Within a month you will know your pattern. Within a quarter you will see problems six to eight weeks before they arrive, which is enough time to chase debtors, delay a purchase or arrange finance calmly rather than in a crisis.

Get paid faster

Receivables are where most small businesses leak cash. Invoice the day the work is done, not at month end. State terms clearly and keep them short; seven or fourteen days is normal for small jobs. Take deposits on anything that involves materials or more than a week of work. Offer card and direct debit so paying is effortless. Send a polite reminder the day after the due date, a call a week later, and have a defined process after that.

Credit terms are a loan you are giving your customer, interest-free. Decide deliberately who gets credit, how much and for how long, and check new commercial customers before extending it.

How to get control of cash flow

1. Open a tax set-aside account Move GST, PAYG and super across as payments arrive. Treat the balance as untouchable.
2. Build a 13-week cash forecast Opening balance, receipts, payments, closing balance, by week. Keep it simple enough to update in minutes.
3. Measure receivable days Compare it to your stated terms. The difference is the cash you are lending customers for free.
4. Tighten invoicing Invoice on completion, shorten terms, take deposits, make payment easy.
5. Set a collections process Reminder, call, escalation, with dates. Follow it every time so it is never personal.
6. Negotiate supplier terms Ask for 30 days where you have none, and pay on the due date, not early and not late.
7. Arrange a buffer before you need it An overdraft or line of credit is cheapest to set up when the business is healthy.

Real-world example

A Newcastle signage business grows itself into a cash crisis

Hunter Signs makes shopfront and vehicle signage for commercial customers. In a strong year revenue grows from $600,000 to $900,000 and profit is up too, yet the owner, Leanne, is repeatedly late on super and twice asks her supplier to hold a delivery. Her accountant measures the cycle: materials are bought on 14-day terms, jobs take three weeks, invoices go out at month end and customers pay in an average of 52 days. Cash is tied up for roughly 80 days on every job, and the extra $300,000 of sales has absorbed about $65,000 of cash into receivables alone.

Leanne makes four changes. Every job now requires a 40% deposit. Invoices go out the day of installation. A fortnightly reminder-and-call routine brings receivable days down to 31. She negotiates 30-day terms with her main supplier. Within two quarters the cycle is under 40 days, the super is paid on time, and she arranges a modest overdraft while the bank can see a healthy forecast rather than a crisis.

Common mistakes

• Spending the GST The bank balance looks healthy right after customers pay, and then the BAS arrives. Set it aside on receipt.
• Invoicing at month end Every day between finishing work and sending the invoice is a day added to the cycle for free.
• Growing without funding the growth More sales means more stock and receivables. Model the cash need before you say yes to a big contract.
• Paying suppliers early out of politeness Pay on the due date. Early payment helps them and costs you, unless there is a discount for it.
• Only looking at cash when it is tight A weekly forecast turns surprises into plans. A crisis forecast only turns panic into a spreadsheet.

KPIs to track

• Receivable days Average days from invoice to payment. Target your stated terms plus no more than a week.
• Cash conversion cycle Inventory days plus receivable days minus payable days. Shorter is better; negative is excellent.
• Weeks of cash cover Spendable cash divided by average weekly outgoings. Many owners aim for at least six to eight weeks.
• Overdue receivables Dollar value and share of total receivables past due. Watch the trend, not just the number.
• Lowest forecast balance The minimum closing balance in your 13-week forecast. If it goes below zero, act now.

Frequently asked questions

How much cash should I keep in reserve?

There is no single answer, but a common target is enough to cover six to eight weeks of outgoings, plus the next BAS and super payments. Seasonal businesses and those with long payment cycles need more.

Should I offer a discount for early payment?

It can work, but it is expensive: a 2% discount for paying 20 days early is a very high annualised cost. Deposits, shorter terms and easy payment methods usually achieve more for less.

Is an overdraft a sign of trouble?

Not if it is used to smooth timing differences and is regularly cleared. It becomes a problem when it is permanently drawn, which means it is funding losses or growth that should be financed another way.

What if a customer simply will not pay?

Follow your process to its end: final notice, then a formal letter of demand and debt collection or small claims. Deposits and credit checks are the best protection; a registered adviser or lawyer can help with the recovery steps.

Key takeaways

• Profit is recorded when work is done; cash arrives when customers pay. Manage both.
• GST, PAYG and super in your account are not yours. Set them aside on receipt.
• Measure the cash conversion cycle and shorten it with deposits, fast invoicing and fair terms.
• A weekly 13-week forecast shows problems six weeks out, when they are still cheap to fix.
• Arrange buffers such as an overdraft while the business is healthy, not during a crisis.