nem Australasia

View Original

Managing your cashflow well: A guide on how to measure

Jamie Simpson

Getting to grips with the basics

Ever found yourself scratching your head, trying to fathom the ins and outs of cashflow? Managing your cashflow well – it's not only essential, it's crucial to the longevity and success of your business. After all, cash is king, right? Here’s some basic tips, to ensure you keep the cash flowing well in your business.

The ABCs of cashflow

We often hear the term 'cashflow', but what does it really mean? In its simplest form, cashflow represents the money coming into your business (income or revenue) and money going out (expenses). Think of it as the lifeblood of your business; without a healthy cashflow, your business could encounter challenging headwinds, or worse have to close!

How to measure your cashflow: a three-step dance

Here's where the rubber meets the road: measuring your cashflow. How do you ensure your business is not only making money but also keeping enough of it to sustain operations? Let's break it down:

  1. Income or Revenue: This is the bread and butter of your business. The money you earn from selling goods or services is your income. A firm grasp of this figure is vital.

  2. Expenses: The cost of running your business is your expenses. This could include rent, wages, supplies – you get the picture!

  3. Net Cashflow: Subtract your expenses from your income, and voila! You've got your net cashflow. This is a real 'tell it like it is' number – showing the health of your business in cold, hard cash.

The working capital cycle: the nitty-gritty of cashflow

Now, let's delve a little deeper into the working capital cycle. This concept, also known as the cash conversion cycle, helps businesses understand how efficiently they're managing their cash flow. It consists of three components:

  1. Debtor Days: The average number of days it takes for a business to receive payment from its customers after a sale has been made.

  2. Inventory Days: The number of days goods sit in inventory before being sold.

  3. Creditors Days: The number of days a business takes to pay its suppliers.

By adding your debtor days and inventory days, then subtracting your creditor days, you'll calculate the working capital cycle in days. This number tells you how long cash is tied up in working capital.

Why cashflow really counts

Managing your cashflow well - it's more than a financial strategy; it's an art! It helps you see beyond profit and truly understand how your business is performing. Remember, a healthy business isn't just about making money, but keeping it flowing!

Remember the old saying – cash is king? Well, knowing how to measure your cashflow is what makes you the king or queen of your financial castle. So, keep these tips handy and stay on top of your game!

References:

Author: Brent Irvine, Partner nem Australasia.
This article is based on research and opinion available in the public domain.