Cash flow is the lifeblood of business, whether you’re a sole trader or a multi million dollar enterprise.

Profit on paper means far less if you can’t pay your bills or day to day operational expenses, and it’s where we see business owners get tripped up from time to time. 

Cash flow management, and ultimately how we view & handle money is deeply embedded into, and influenced by our psychology. Often acting as a mirror to our emotions, past experiences, our deep unconscious and cognitive biases. 

As a counsellor and accountant, I see this in practice every single day. We all navigate this to differing extents – to be human, and we have the remarkable ability to reflect, grow & evolve. 

The blog below outlines a broad & basic yet practical approach to cash flow management. As you may come to implement the overall process (or perhaps you already have), it can also welcome in a level of Self reflection, and potentially a cuppa tea & conversation with your accountant. If you can get your cash flow practices nailed down from the outset, you’ll be in good stead ongoing.

Cash flow management can be, broadly, broken down into the following steps:

• How we bring cash into the business
• How we hold cash
• How we direct cash out of the business

An integral part of cash flow is looking at how & when we are bringing cash in. This will involve looking at areas like our revenue streams, pricing, payment terms, “how & when” we are invoicing ie. up front deposits, milestone payments, time or value based billing and so on. It will also involve an element of forecasting for weeks, months and up to year (or more) ahead.

For the purpose of this blog, and for the sake of brevity, we’ll focus on how we may view and handle cash when it lands in the business bank account.

Here are some practical steps to consider below:

Step 1.

Intentionally set aside funds for your own takings or wages – whether you’re a sole trader or Director of your own company. Consider what you require to meet your own personal needs? The appropriate amount will be relative to your circumstances, the nature of the business & what your overall intentions are at your stage of business & life. For this example we’ll set aside 30% 

Reflecting on this question first helps to highlight the importance of how we bring cash into the business, with the items previously mentioned of revenue streams, pricing, payment terms, and the “how & when” we are invoicing. To ensure you’re not only breaking even, but also have enough in the pot, so to speak, to cover operational expenses, taxes, potentially reinvest into your Self and/or business, to live the life you want & to be on the front foot with cash flow rather than unintentionally accruing debt over time. 

Step 2.

Broadly, you’ll want to be setting aside between 20-30% for income tax. The right amount to set aside is very specific to the nature & structure of your business, and your/its applicable tax rate. Some may need to set aside more or less, so chat to your accountant to determine what’s right for you & your business structure. 

Step 3.

You’re GST registered, you’ll need to set aside 10% of your sales. Consider your business as a vehicle that is collecting GST for the ATO, the cash may land in your vehicle but ultimately you’re just dropping it off at the ATO, so set it aside from the point of receipt.

Step 4.

You’ll want to be setting aside funds for business expenses, and also the proverbial rainy day. Now this percentage is entirely at your discretion, and also very dependent on the nature and type of your business. For simplicity, we’ll use 20% in this example. 

Step 5.

Then you will want to set aside a % of your owner takings or wages (from step 1) for your own superannuation. 

This is optional as a sole trader, but it can offer a great tax deduction & help to keep reinvesting funds into your own “circle of wealth” rather than paying more via tax to the ATO. If you’re operating a company, this will be compulsory on top of your wages & will be deductible to the company.

A practical example below:

Let’s say you’re doing your monthly bookkeeping & banking. Your business has received $16,500 income in the bank during that month. In this scenario, the business is GST registered.

Here is a breakdown of what cash flow management might look like in practice:

• $4,500 for owner takings/wages
• $1,500 for GST
• $4,500 for income tax obligations 
• $3,000 for op expenses & reserves 
• $540 for superannuation

Total $14,040 set aside

Leaving $2,460 in trading bank a/c

What is left in the pot after all is considered can often come as a surprise to business owners. And this may show, without proper cash flow planning, how things (spending & allocation of funds) can go awry.

Important to note: 

Your net profit figure doesn’t necessarily translate to the same amount of money in the bank. Profit feeds into, but is separate to cash flow. So if you’re looking at your net profit & wondering where the cash has gone, that will be because not all expenditure will be sitting in the P&L

Whether you’re years into an established business, or you’re just starting out: making time to sit crunch & review the numbers is essential. Planning ahead for pricing, profit, tax strategy & cash flow are all integral to success & prosperity.

Each person, each business, and related goals and intentions are incredibly unique. It can help immensely to sit & map out a blueprint of sorts to help you move forward in a way that helps you and your business grow and thrive.

If you’d like to explore this in more depth with Holly, reach out via email or the Contact page on this website.