Where did all my cash go?

You have just survived one of the traditionally toughest cash flow months for small and medium sized enterprises. But before you sit back and breathe a sign of relief, now is the perfect time to take a look at your cash management systems.

To help you and your business, we have teamed up with specialist accounting and business consulting group Hayes Knight to bring you this practical series on the key issues surrounding business cash flow.

Let's get started

If you are going to manage your cash flow you need to understand the various ways that money comes into your business. When doing your cash flow planning, it is important to think about all possible sources of cash, not just current ones, as different factors will come into play throughout the course of your business.

Here's a list of some of the sources of cash to get you started.

Capital – this is the owner's money – how much you put in to start the business or money you put in at a later time, perhaps to assist growth or to support business needs. Every business needs capital to operate, how much varies from business to business. You should have a very clear understanding of the amount of capital your business needs to function effectively.

Debt funding – this may come from your bank or some other lender. Typically you will pay interest on this money and you will also need to make repayments against the money that has been borrowed. When you borrow money for your business (and there is nothing wrong with doing that) you need to have a plan for how you will repay this money over time. And remember, the most likely way to repay debt is out of profits. So you need to make sure that your business is profitable.

Cash Sales – if you sell your goods or services and they are paid for immediately then this is a ready supply of cash for the business. The majority of retail and service businesses operate on a cash sales basis.

Debtors collections – if you provide accounts for your customers then you have to collect the money from them. Making sure your customers pay their accounts and pay them on time is one of the biggest problems for most businesses. Collecting your accounts quickly is a key to good cash flow management.

Sale of assets – this one probably won't happen all that often but none the less should not be ignored. If you have been in business for some time then you may have built up surplus assets. This could be some plant and equipment that you no longer need or an extra vehicle. If it's not being used in the business then why not think about selling it. Your business may be able to put the extra cash to a good use.

Return on investment assets – you may have some money on deposit, a property rented out, some surplus factory, shop or office space rented out or share investments producing dividends. Any of these can add to the cash coming into the business.

Where does all my cash go?

This is probably one of the most frequently asked business questions.

You get to the end of the month. It has been a busy period, plenty of trading activity, some good sales and the cash seems to have been rolling in. Then your bank statement arrives and you realise that there has been as much going out of your bank account as has been coming in. And what's more, there are still bills to pay.

Or you go to your accountant for your end of year visit and hear about the profit you have made and how much tax you need to pay. Ever asked the question, "If I'm making all that profit where is it?"

Cash goes out of a business in five broad areas:

Operating costs
Capital expenditure
Loan repayments
Tax
Profits and dividends

Let's look at some examples:

Operating costs	Capital expenditure	Loan repayments	Tax	Profits and dividends
Wages	Purchase of new motor vehicle	Bank loans	Income tax	Partners drawings
Motor vehicle	Computer purchase	High purchase loans	Quarterly company tax instalment	Annual dividend
Rent	Shop fit-out	Term loans	PAYG instalment tax Annual tax assessment	Shareholders drawings
Insurance			Annual tax assessment
Advertising
Electricity
Telephone

Some of these areas, like operating costs go out all of the time. Others tend to occur at specific times of the year, such as payment of tax instalments. And some tend to occur at irregular intervals depending on what is happening in the business or based on the need's of the owners.

Because the cash doesn't go out of the business evenly over the year, you cannot predict your cash needs without doing some planning.

When you start to map out on a month-by-month basis where the cash is going you will see that there are some months where cash outflow is much higher than others. These are the months when your bank account will run down and where your liquidity can come under pressure. This could happen if you lodge your Business Activity Statements on a quarterly basis as this brings together the payment of a number of taxes in to one single event and the amount can be substantial.

But forewarned is forearmed. If you know when these payments are going to occur you can plan and prepare for them

Series 2: How to avoid running out of cash
Series 3: Show me the money!
Series 4: Bringing in the money – faster!

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