Cash Flow and how to understand it!

Money in, money out – it’s that easy, right?


Think again! Cash flow management can be one of the trickiest parts of running a business. And it is one of the MOST IMPORTANT finance skills to master. If we all ran cash only businesses, it wouldn’t be a problem. You’d supply a service or product and receive payment immediately, pay for goods or expenses in cash then wages to staff. No worries.


But that’s not the way the world works anymore. Invoices are sent and can paid anywhere between seven and 30 days. And what if they’re paid late? Wages might need to be paid weekly, stock needs to be purchased to last the next three months, everything is moving in different time frames. And then add on tax or GST to be paid quarterly, and don’t to forget superannuation. There’s a lot going on!




Step One – Build a cash flow plan:Your FREE downloadable Valo Financial cash flow plan

Grab your free downloadable plan >>


Get a piece of paper and divide it into 12 sections. Write the months of the year at the top of each section. I like to do 3 x 4 boxes on a page (or you could write the months of the year across or down a page). Set your page up so you can see the months of the year at a glance.


Use 3 different colour pens – one for fixed monthly expenses going out, one for variable expenses, and one for income.


Write your monthly (non-variable) expenses: wages (staff and money for you, the owner), rent, subscriptions (Mailchimp, Xero, website), car lease, mobile phone, insurance, anything that is paid monthly. Add up the monthly amount you pay to keep the business running.


Write (in another colour pen) against the corresponding month anything that is purchased or spent that is not paid on a monthly basis e.g. containers, mailing boxes, quarterly business bills, courier costs, stock. It may be stock that is ordered every three months, or boxes for sending out parcels are ordered every six months in bulk.


With the third coloured pen, write in what you roughly earn as business income each month. Account for seasonal changes or slow months, like January. It’s okay to estimate!


Add up the two types of expenses and take off your income. This will now show you which months you will be flush with cash and which months will be tight. This will help you identify when you need to put money aside for the slower months or the months with large stock purchases. If there are any negative months, you will definitely need to put some cash aside from another month.


RESULT – This is your simple, big picture, cash flow plan!


Step two – Set up your bank accounts

This is one of the easiest way to ensure you have money for tax time and money for large items in the future. It would be great if you could just keep all your money in the one place and know there was more than enough there for tax time, pay for stock in advance and cover the slow months, but in reality this doesn’t always happen.


Consider setting up different bank accounts for different purposes. Your business may need three accounts:

OPERATING bank account (business as usual)

  • Deposits for sales or services
  • Payment of normal monthly expenses

INCOME TAX bank account

  • If you are registered for GST- 10% of sales may needs to go here.


  • Items you need money for later on, like a business savings account
  • Put some cash aside for a rainy day


Your approach to cash flow management can help or hinder your business – and this is a simple example of the understanding your cash flow. For some smaller businesses, this will suffice however if you have a larger, more complicated business you will need to tweak this to suit your needs. If in doubt, contact us for some advice about the best way to go about setting up your cash flow for success.

Have you downloaded our FREE CASH FLOW PLAN?