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Fairly certain we all have used combinations of this phrase and probably seen/read/discussed many different explanations as to what it actually means to a business. Terms like “cash liquidity”, ‘cash-flow management”, “cash burn rate”, “average debtor/creditor days” do not make it easy to understand why your business never seems to have enough money in the bank for payments to suppliers and employees, but looks like it is really profitable!

Here are my ABCs to get every small business closer to unravelling the puzzle

A. What is cash-flow?


Starting Cash Balance + Money InMoney Out = Ending Cash Balance


Let me break it down in 5 points:

  • Cash-flow is measured within a time period, usually 1 month
  • A business typically has a starting balance of cash at bank and an ending balance of cash at bank (it is either zero or a positive number).
  • If the total amount of Deposits into your bank is MORE than the total amount of Payments that actually exits your bank within a given time period, this is GOOD, or POSITIVE cash-flow.
  • If the total of amount of Deposits into your bank is EQUAL to the total amount of Payments that actually exits your bank within a given time period this is NEUTRAL cash-flow.
  • If the total of amount of Deposits into your bank is LESS than the total amount of Payments that actually exits your bank within a given time period this is BAD, or NEGATIVE cash-flow.

Common misunderstandings:

  • Sending a sales invoice to a client only is a request for customer payment– it does not mean you are instantly receiving money. Generally speaking, this is the area where you have least control in a business, however there are plenty of incentives, payment methods or even short term financing which can be deployed to help your business receive cash more quickly.
  • Receiving an invoice from a supplier is only their request for payment– it does not mean you are instantly paying money. Generally speaking, this is the area where you have the most control in a business, however you need to manage your supplier expectations and not be late on payment too often.

Key Indicators:

  • Sustained POSITIVE cash-flow over multiple periods is a where most businesses want to be – it means you have cash to expand, pay bonuses, repay investors (or yourself).
  • Sustained NEUTRAL cash-flow over multiple periods means that your business is just treading water/surviving.
  • Sustained NEGATIVE cash-flow over multiple periods is where most businesses want to avoid – it means that you are paying more cash out than you are receiving in (or cash burn rate)

B. What is cash-flow forecasting?

In a nutshell, this is the art of estimating:

  • How much cash the business will RECEIVE as deposits (from sales or other sources) in future time periods (e.g. next 3 months) and;
  • how much cash the business will be PAYING (for suppliers or capital expenditure) in future time periods (e.g. next 3 months).

C. What is cash-flow management?

ABCs are not meant to be rocket science – 5 key points to note for beginners

  1. Identify Your Cash Break-even Point (cash-flow NEUTRAL), or Cash In = Cash Out. Being able to balance this equation is a simple measure of business success.
  2. Optimise your Accounts Receivables – minimise delays between payments by tightening credit terms (reduce to net 10 versus net 30/60) and/or offering solutions/incentives for faster customer payments
  3. Extend your Accounts Payables – do the exact opposite of accounts receivables! When negotiating with various vendors, maximise your payment terms where possible to net 30/60 or slice up your payments into monthly instalments – all helps your cash-flow
  4. Be A Smart Spender – identify those expenses which are directly correlated with Put simply, separate into Need vs. Nice-To-Have buckets! For example, online store owners will need an integrated inventory management and payment gateway solution. It may be resource and time intensive but is absolutely necessary if you want to gain business transparency and take payments! Definite NEED!
  5. Keep a Cash Reserve – having a buffer helps you easily navigate out of those unexpected disasters that will happen during your venture. I suggest keeping a minimum of three to six months of OPEX (basic operating expenses like rent, payroll etc) reserve at ALL times. If you dip into the reserve, ensure you replenish!

Necessary Actions:

  1. Checking your starting balance of cash at bank, then
  2. Forecasting what you will receive and pay out, then
  3. Assessing what you actually received and paid out, then
  4. Checking your closing balance of cash at bank, then making a decision on whether your cash position is viable.
  5. Repeating the above steps for the next period.

Step 4 is where the real decision making kicks in – what to do next?

Is your cash hiding in inventory, WIP, debtors?

Take a business loan? Take a shareholder loan?

Look for investment?

Drop us a message if you want to discuss any of the above and how we can provide insight to manage your short-term cash-flow better.


Just to make a final point – there is NO SUCH THING as a silver bullet for conquering the cash-flow beast.


Make learning the ABCs Habitual. Make it Essential.

Just like checking your smartphone the first thing you wake up.

1Original article appears here


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