Cash flow management for sole traders
As the owner, financial controller and senior employee of your business, you have plenty to think about. Keeping your enterprise solvent is one of the most important considerations – and that’s all about keeping on top of your cash flow.
Cash flow is simply a measure of the money coming into your business versus the money going out of it.
If there’s more coming in than going out, you have positive cash flow – which is ideal. If you’re spending more than you make, you have negative cash flow – although this may be expected if you have start-up costs.
Your business income might include elements such as:
Accountants and bookkeepers call the money you are owed ‘accounts receivable’.
Your business expenditure might include elements such as:
The money you owe for goods and services is called ‘accounts payable’.
People talk about ‘balancing the books’ when the debit and credit sides of a business balance each other out, including any profits achieved or losses sustained. You could view and assess your cash flow in much the same way by calculating your ‘cash position’ on a regular basis.
At the end of each month, for example, your basic cash position is:
(Total cash in) – (Total cash out)
If this number is:
Having a business bank account1 that’s separate from your personal finances will help simplify this calculation each month. If you have periods of ‘positive cash flow’ you may also wish to consider linking your transaction account to a business savings account1 where you could earn interest on your surplus.
One way that may improve your cash flow is to speed up your ‘working capital cycle’ – the time it takes to turn existing assets into cash.
Let’s say you paid a wholesaler for a box of widgets, then sold them on to a customer a month later for a profit, then received payment for them a month after that. In this instance, the working capital cycle is two months.
Reducing that cycle to six weeks may improve your cash flow. Three ways that could help are:
We’re not suggesting you upset your suppliers. But if you’re in the habit of paying your bills early, perhaps think about just paying them on time instead. And it could be worth reviewing your payment terms and renegotiating them if necessary.
‘Cash flow is key’ as they say. Follow these tips to help improve yours, and don’t forget to seek independent professional advice when applicable.
1. Westpac’s products are subject to terms, conditions, fees and charges; and certain criteria may apply. Before making a decision, read the disclosure documents for your selected product or service, including the Product Disclosure Statement and T&Cs for Westpac business bank accounts, business savings accounts, foreign currency accounts and online banking, by clicking the above links and consider if the product is right for you.
The information in this article is general in nature and does not take your objectives, financial situation or needs into account. Consider its appropriateness to these factors; and we recommend you seek independent professional advice about your specific circumstances before making any decisions.