Cashflow: how to calculate, plan and manage it for your business

For small-to-medium businesses in particular, cashflow is one of the most important elements of business financial health. In fact, inadequate cashflow is one of the major causes of business failure.

So, what is cashflow? And how can you calculate, plan and manage it to your business’ financial advantage?


What is Cashflow?

Cashflow measures the net amount of money going in and out of a business over a set period of time. It also shows the financial health of a business by helping you to understand your ‘liquid cash’ position and helps you predict how much cash you can expect to have available at any given point when used for forecasting.


How to Calculate Your Own Cashflow Report

To calculate your cashflow, write down your opening balance for a given month. Then, categorise all cash incoming for that month by common fields, such as:

  • Sales
  • Asset sales
  • Other income

Add up the total of all your income sources. 

Do the same for your cash outgoing that month, categorised by your most typical business expenses, such as:

  • Purchases (e.g. stock)
  • Advertising
  • Payroll
  • Utilities
  • Other expenses

Calculate the total of your expenses. 

Your monthly cash balance is the difference between cash incoming and cash outgoing

Finally, add your monthly cash balance to your opening balance for the month to get your closing balance – hopefully it is positive. 

Repeat this for each subsequent month in the reporting period you are reviewing to generate your full cashflow report.

Use a cashflow spreadsheet to record your data and make a notes section with any assumptions, such as figures being inclusive of GST. Here’s an example:

CASHFLOW Month 1 Month 2
Opening Balance $10,000 $10,550
Cash incoming
Sales $1,000 $1,500
Asset sales $100 $50
Other income $100 $50
Total incoming $1,200 $1,600
Cash outgoing
Purchases $500 $250
Advertising $50 $25
Utilities $100 $120
Total outgoing $650 $395
Monthly cash balance $550 $1,205
Closing Balance $10,550 $11,755

Cashflow Management

Managing your cashflow is essential for planning ahead. You’ll be in a much stronger financial position if you understand how much cash you need, where it’s coming from and how long it takes to get it. 

Here are some steps to help you with your cashflow management:

1. Understand Your Working Capital Requirements 

Understand the amount of working capital your business needs to keep running. You’ll want to consider how much inventory you need to hold, what payments are due and when, and the length of time it takes to cycle from cash out to suppliers to cash in from customers.

2. Establish Your Working Capital Needs and a Buffer 

Make sure your business has enough cash in the bank to meet your working capital needs. You’ll also want to ensure you have a buffer – either business savings, personal funds, overdraft or a revolving credit facility to fall back on in the event of a rainy day.

3. Plan Ahead 

The unexpected will always happen, and it’s never a good thing to find out that you can’t survive when it does. Plan ahead by preparing cashflow forecasts for the upcoming year as well as a month-by-month basis.

4. Review Your Systems 

Review your systems to ensure that you’re invoicing your customers regularly, and that you’re consistently updating how much is owed to you and how much you owe. Always review incoming invoices as well to ensure charges are accurate.

MYOB invoicing keeps track of outstanding payments and sends automatic reminders when invoices are overdue. Income is updated automatically when paid, so you always know where you stand. 

5. Speed Up Your Cash Conversion Cycle

A cash conversion cycle measures the time span between disbursing and collecting cash. You can speed up this timeframe by asking for a deposit, putting customers on retainer or requesting monthly payment. You could also cut back your inventory levels or negotiate shorter delivery cycles or longer payment terms with your suppliers. 

6. Make it Easy for Customers to Pay You

Always give your bank account details on your invoices, accept EFTPOS and credit cards, and set up a PayPal account. The easier you are to pay, the quicker you can receive funds and the better your cashflow position will be. 

With MYOB online invoices, your customers can pay via AMEX, Visa, MasterCard and BPAY.


The Limitations of Cashflow Reporting 

Cashflow reporting does have some limitations. You won’t be able to understand your net income for a period because cashflow statements ignore non-cash items. It also can’t help assess profitability as it doesn’t take into account costs or revenues.

Finally, it can’t help you understand your real liquidity position because it only presents your cash position as of a particular date. 


Using MYOB

MYOB accounting software features are designed to help you understand your cashflow position so you can better plan for and manage your business. 

MYOB helps you create detailed cashflow reports and compile all your income and expenses onto one easy-to-view dashboard (including outstanding payables and receivables).

More importantly, when you link your bank account to your MYOB software, you get an accurate 24/7 view of your spending that will help you keep your cashflow targets in view. 


Better Business with Cashflow Management

Good cashflow management means more cash in the bank. And more cash in the bank gives you increased flexibility in your business. Making the best use of the cash you have means you can be less dependent on increasing revenue, and more focused on running your business. 

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