How to manage your business cash flow

Cash flow is the money flowing in and out of a business, recorded when the money actually moves. It is not the same as profit. Under accrual accounting, income can be recorded before the customer pays, so a business can show a profit and still struggle to pay its bills if money comes in more slowly than it goes out.

business.gov.au publishes a free cash flow statement template. Each month follows the same steps:

1. Start with the opening balance: your bank balance in the first month, then the previous month's closing balance.
2. Add cash incoming, such as sales, payments from debtors and grants.
3. Take away cash outgoing, such as purchases, rent and rates, utilities, and advertising and marketing.
4. The result is the closing balance, which becomes next month's opening balance.

business.gov.au suggests updating the statement regularly to spot payment cycles and seasonal trends, so you can prepare for busy times and plan for quiet periods.

A cash flow forecast is the same statement filled in with estimates for future months. business.gov.au describes it as a tool to help you see whether you will have enough income to cover your costs, so you can prevent cash shortages and avoid debt.

Base the estimates on previous years: look for seasonal trends, regular sources of income and your major costs, and put each one in the month the money is likely to move, not the month the invoice is dated. Label estimated figures clearly so they are not mistaken for actual ones.

• Send each invoice as soon as you make the sale, and keep a copy for your records.
• Set clear payment terms, such as payment up front or within 30 days, and put them on your invoices and contracts.
• Decide how you will collect overdue payments, and follow up customers who haven't paid.
• Review your payment terms regularly to make sure they still suit the business.

business.gov.au suggests talking to suppliers about terms and pricing that suit your business. A longer payment term, such as 60 days instead of 30, lets you hold on to cash for longer, and committing to regular orders can earn a lower price.

Review your costs for savings, and manage stock carefully: regular stocktakes show what is selling, and reordering only when needed keeps cash from sitting on the shelf.

Put money aside regularly in a separate bank account for costs you know are coming, so the cash is there when they fall due. Include employee costs such as wages and allowances in your budget and cash flow statement.

Keep a list of due dates, with reminders or scheduled payments. Depending on the business it might include payroll tax, licence renewals, supplier invoices, rent and loan repayments.

Compare your estimated and actual income and costs regularly, so a shortfall shows up early. If one does, you can reduce costs, follow up overdue invoices or revise your budget.

business.gov.au lists warning signs that cash flow is under pressure: struggling to pay bills, relying on credit and delaying payments to suppliers. Acting early, and getting advice before a problem grows, gives you more options.