Heads up: there’s no one else who can manage cash flow for you.

“I reckon you can get an accountant for everything – but not for cash flow,” says Go Kindly founder, Laura Conti. “As a business owner, you should have a really tight grip on it.”

“I couldn’t agree more,” says Michelle Kvello, Virtual CFO and accountant with Lantern Partners. “Every small business owner must know their cash flow forecast inside out. It’s the most important way of managing risk and I can guarantee you you’ll sleep better at night once you have that clarity and know when to take action.”

Where should I begin?

If cash flow feels totally foreign to you or you’re feeling unsure about where to begin, keep it simple, says Michelle Kvello. “Before you start setting up complicated spreadsheets or downloading cash flow apps, just look at your invoices: what do you owe and what are you owed?

“That after all, is the heart of cash flow – payments out, payments in.”

Then you can start organising the two big buckets of receivables (what you’re receiving) and payables (what you need to pay) a bit more systematically. Michelle advises breaking payables into groups including:

• Wages or contractor payments
• Regular materials or supplier payments
• Rent
• Regular utility payments (internet, phone, electricity)
• Tax and compliance payments (GST, income tax, superannuation, PAYG withholding)

How far ahead should I forecast cash flow?

“I always encourage people to look at a short-term period of, say, three to four months, on a weekly basis,” says Michelle. “If you only forecast monthly, you can get a distorted idea of how things are going because for many businesses, receivables tend to be quite ‘lumpy’ based on scheduled invoicing and payment terms. A full-month forecast doesn’t accommodate that ‘lumpiness’. You need a period of at least three months to give an accurate picture and allow yourself enough time to react.”

Michelle suggests that, while some business owners might get really granular, checking in daily, a weekly session is usually sufficient.

“And remember, the information you get will only be as good as the information you put in. So if you’re using a program like Xero or MYOB, you must be diligent about entering the right data regularly so you get accurate output.”

What if you don’t have software to help? You can use a good old Excel spreadsheet – and here’s a handy cash flow forecasting template to get you started.

“It can mean a lot of manual input which can be time consuming,” Michelle says. “But it can still be a really effective way to keep track of your cash flow.”

Do it early and often

Michelle’s two top pieces of advice for managing cash flow are:

1. Don’t just do it when you’re having a panic. Cash flow management needs to be regular and consistent. That way you don’t get any surprises. Saving it for when things are already bad defeats the purpose.
2. Know what your minimum reserve is – it shouldn’t be zero! A good rule of thumb is three months’ worth of cash. That way you have enough to keep running the business if, say, a big client is late paying or you need to invest in something big.

Then when you hit that red line – the one that says you have three months’ operating costs in the bank – it’s time to get proactive.

“Ask yourself how you can start building up reserves, and think about strategies for generating revenue and rationalising costs,” advises Michelle. “Is it time to get on the phone to the ATO and arrange a payment plan for your next BAS payment? If a client is due to make a sizable payment in a month or two, drop them a line, make sure they’re on track.”

Find more tips for collecting payments on time here.

“Conversely, if you have flexibility with suppliers and have a big invoice due, maybe there’s room for them to offer you a payment plan,” Michelle suggests.

“It can be a bit scary. Small business owners can get put off looking at their cash flow for fear they’ll find a big problem. But it should be a preventative measure. And, as the business owner, the buck stops with you.”

How this small business owner rules her cash flow

Laura Conti and husband David are the founders of online retailer Go Kindly which donates 50% of profits to vulnerable women in need.

Managing cash flow has been crucial to the success of the business, through lean times and good times.

“We have a cash flow spreadsheet and we spend half an hour reviewing it every week,” says Laura. “We find it helps us pick out unnecessary spend and to identify when we’re spending mindlessly. It’s helped us take educated risks by knowing when we can afford to.”

A sophisticated tech user, Laura hasn’t yet found software or a platform that is flexible enough for her.

“So a spreadsheet does the trick. And you can download your bank statements straight into it which is really helpful,” she says.

“We have a 12 to 18 month plan and are continually tweaking and adjusting it based on our cash flow. And our personal goals heavily inform our business goals – it’s circular because our business ultimately pays for our mortgage.”

Having a laser focus on cash flow means Laura has been able to hire extra staff when needed, buy stock in advance and find a building to rent. Moreover, in the first ‘hairy’ months of the pandemic, their control of cash flow meant they could make quick, informed decisions about where to cut spending.

“It was pretty terrifying at first,” Laura remembers. “But just by looking at our cash flow, we were able to clamp down fast on unnecessary expenses.”

Cash flow management also allowed them to make an informed decision to order a large amount of product in bulk to take advantage of a better price.

“Even so,” says Laura, “we did run out of stock for a short time and that’s reminded us going forward that we want to be able to build in that resilience and have some up our sleeve should things go south again with the pandemic or another challenge.”

When the opportunity to rent a building came up, thanks again to cash flow forecasting, they knew it could work if they could sublease a section of the building and negotiate a pandemic-related rent reduction. Nearly 18 months later, they’ve grown into the building and no longer need to sublease part of it.

Her advice to other small businesses owners wanting to master cash flow?

“You can learn as you go. It’s the very basics of accounting – what money comes in, what money goes out. Don’t over complicate it for yourself.”