Small business accounting – The importance of cash flow.

The importance of proper cash flow in your business cannot be overstated.

A key reason that many businesses fail is not because of lack of trade or profits, but poorly managed cash flow. Cash is the oil which makes the wheels of your business turn and without it, simple everyday operations become an impossible challenge.

Small business accounting hinges on this, and without the correct level of cash flow management, you could say your enterprise is doomed to fail. This is one of the first things that any decent tax specialist or tax accountant in Melbourne will advise new clients.

What is cash flow?

There is a big difference between cash and profit. Cash flow is the money you have available to enable the business to operate. While your company could be making a decent profit, without properly managed cash flow, it could be in jeopardy. It covers day to day expenses and business managers must have a clear idea of the cash flow situation at all times.

How to create a cash flow budget

In order to create a cash flow budget that is adequate for your business, you must get realistic ideas of the expenses which will need to be covered.
Looking at last year’s accounts and sales data is a good starting point.
The budget must reflect events which are likely to have an impact on cash flow so that you are not caught off guard. Your tax specialist or tax accountant can best advise you after a review of your company’s projections.

Realistic projections

Having unrealistic projections can prove difficult in business.
If you are expecting significant growth, then your cash flow budget must reflect this.
If you have unprecedented demand for stock, then what often happens is that businesses clean out their available cash to cover this cost, and then are left with no contingency fund.
Equally, keeping a very close eye on stock levels, so that you have just the right amount to hand is crucial. After all, you don’t want all your cash tied up in stock that isn’t selling quickly enough.

Of course the fast turnover of stock is not to be looked at in isolation. Debtor management and prompt collections from debtors goes hand in hand to ensure sufficient cash is on hand to meet obligations.  Strong relationships with your customers are important to maintain.

At Scott Partners Chartered Accountants in Melbourne, we pride ourselves on being the best in the field. Our experienced team are standing by to help you with all your accounting, tax and financial advisory needs.

Visit https://scottpartners.com.au/ or call (03) 8686 9000 to make an appointment today.