Keep track of your cash

For most businesses, cashflow is a critical factor for success or failure. You need to know just where your money is going so you can avoid a cash crunch that possibly leads to business failure.

Cash flow is a statement of money coming into and going out of your business. The timing of cash resulting from sales is what actually determines your cash flow.

Think positive

Every business has positive cash flow or negative cash flow. A positive cash flow is created when the cash coming in exceeds cash going out over a specified period of time.

Cash in includes items such as:

• cash from the sale of your goods or services
• loans to the business
• government grants.

Cash out includes items such as:

• payments for goods purchased
• payments for your day-to-day operating expenses
• debt repayments
• tax payments
• payments for asset purchases.

You can make a profit without any cash

Remember!

• Making a profit does not mean your business will have money in the bank.
• Having money in the bank does not necessarily mean your business is profitable.

Differences explained

Profit and loss (P&L) statements, budgets, and budget and cash-flow statements serve different purposes.  For example:

• some of the money you bank won't appear in your P&L statement (e.g. a loan to your business is a cash inflow but it's not profit)
• some of the money you pay out won't appear in your P&L statement (e.g. buying a business asset is a cash outflow but it's not an expense because you've bought an asset)
• some expenses don't involve paying money from your bank account (e.g. depreciation of assets)
• a P&L statement recognises profit from a sale at the time you make it (cash flow from the sale may occur some time later)
• a P&L statement recognises the cost of a sale at the time you make it (often you'll have paid for these costs before the sale).

To improve your cash flow, see the Preparing a cash-flow budget fact sheet in the Resources section of the Toolbox.