Cash flow counts: getting it right before year-end

Your company's cash flow should be monitored regularly with your accounts department to prepare for rainy days that may lie ahead. 

With the cost-of-living crisis coupled with near constant load-shedding, there may be more of those than expected. 

What is cash flow — and why does it matter?

Cash flow is the money that goes in and out of a business through customers or clients buying services.

It’s typically categorised as cash flows from operations, investing and financing. Cash received represents inflows, while money spent on expenses such as office rent, business loans, credit card payments or outstanding invoices represents outflows.

Cash flow differs from revenues, which refer to the income earned from selling goods and services. It’s not the same as profit, which is the sum of money left after you’ve subtracted your company’s expenses from your revenues and paid off all outstanding obligations.

Your cash flow tells you what’s in the bank, what’s owed to you — and what you owe to others. It also shows when activity in and out is due to happen. 

Your cash flow statement is a financial statement that reports where your company gets cash from (cash sources) and where it gets spent (cash usage) over time.

Understanding your cash flow is one of the most crucial financial reporting objectives. It’s essential to assess your liquidity and financial performance.

Positive and negative cashflows

A positive cash flow means there’s more money coming into the business than going out. When this is the case, you can settle any outstanding debts, pay your bills on time and in full, and return money to your shareholders. 

A positive cash flow enables you to think about the future, consider reinvesting in your company’s growth, and provide an invaluable buffer against future financial challenges, including ensuring your business continues its operations undisturbed by long bouts of load-shedding.

And, unless you’re not in debt to anyone and have a negative cash flow because you’re investing in growth, you’ll have to find an alternative source of income to pay off any debts. This is not the most comfortable situation to be in. 

Boost your business continuity

Having absolute clarity about your business cash flow can help your financial forecasting. Knowing what’s due in and out and when means you can plan for any outstanding debts, understand the timelines involved in repayments and set cash aside for any planned growth initiatives.

Keep an eye on accounts payable

Staying on top of your cash flow and getting a clear picture of your financial position demands transparency — which also means understanding your outstanding accounts payable.

Whenever you buy something from a supplier without paying for it at the time of purchase, you make that purchase on credit and create an account payable. The amount you owe could be payable from your business in anything from 24 hours to 90 days, depending on the supplier’s terms of business.

It’s critical to track the number of accounts payable you create and the dates they’re due so you have enough cash in the bank to pay on time.

Watch your average payable period

To get the most out of every rand, it can help to maximise your trade credit. This way, you get to hold onto your cash for as long as possible while not being late with payments, incurring added charges, or annoying your vendors. The secret is to strike a balance so that you use each rand to its potential.

Reduce unnecessary expenditure

Some overheads such as staff wages, utility bills and property rentals are unavoidable when you run a business. But if your cash flow’s starting to look a bit too tight for comfort, it’s worth having a look beneath the surface of your day-to-day expenses to see if there’s anything you can do to ease the strain.

You might be able to negotiate more favourable terms, so you can manage your cash flow with more confidence. Or cancel any recurring software subscriptions you no longer use. 

Knowing what’s going out of the business account and why is a great place to start when cancelling any outgoings you no longer need.

From your marketing and advertising spend to employee expenses and petty cash — every penny counts when your cash flow’s tight.

Consider your inventory management

Effective inventory management is a sure-fire way to ease the strain on your finances and get some more cash flowing through the business accounts. If you have a warehouse carrying unsold stock, a new sales plan can soon help you clear the decks and create more cash liquidity.

Keep your financial focus

Today’s automated accounting solutions can give you the necessary visibility to stay on top of your cash flow. Automation prevents the stress of misplaced physical records, and it can save you hours on admin tasks such as filing and recording paper invoices. 

Automating such tasks also reduces the risk of human error during the inputting process. It prevents invoices from going unpaid, avoids late fees and allows you to control when disbursements happen, removing unnecessary and stressful spikes to your cash flow. 

Understanding your sources of cash — and where your money goes each year — is essential to maintaining a financially sustainable business.

When your cash flow is clearly visible, it frees you to focus on the bigger picture. You’ll have the data and the head space you need to think about where you want your business to go in the upcoming financial year. 

Gain financial resilience

Your accountant or finance department can help you collect and organise all the numbers you need to calculate your year-end cash flow. Understanding how, where and when money moves through your business creates financial transparency for you and your team.

With a clear picture of your cash in and out, you can easily monitor your revenue and expenditures. You’ll benefit from your foresight and preparedness with the ability to avoid financial distress and overcome potential financial obstacles with confidence.

Find out how keeping control of your cash flow can help provide stability in the face of uncertainty and a potential economic downturn.

Hassle-free year-end operations

Sage software is designed to help you streamline your business and prepare for your year-end close with ease. Keep financial focus and stay secure, compliant, innovative and sustainable. Sage helps your business flow without costly interruptions.

Click here to learn more about Sage accounting solutions. 

This article was sponsored by Sage.