Cash flow for beginners

abacusManaging your cash flow in business can be like walking across a tightrope while blindfolded and with your hands tied behind your back.

Even the most prepared person in the world often doesn’t see the cross wind until they are in it,  so how can you learn to watch the environment and anticipate those speed wobbles?


This article is written with the new entrepreneur in mind. First of all, congratulations on your new venture!  You are filled with purpose, hope, and determination. It is both the best of and worst of times when your dreams are most likely bigger than your pockets.

Cash flow is crucial to your ability to stay in business. If you don’t have some folding then everything is going to ground to a shuddering halt. Disclaimer: This article isn’t meant to be a comprehensive look at cash flow management instead seeks to offer some practical common sense pointers of where to start. Please seek professional advice.


Most every entrepreneur will tell you that it generally takes twice as long and twice as much money to get into the black than you think it will. When running the figures in your business plan always create projected income streams with a triple trajectory. Whatever you anticipate your income to be (based on your costings and research); you then also need to crunch a ‘worser’ case scenario where you have 20-30% less sales than you would ideally want at any given stage. Your potential backers, the bank, and other shareholders need to see that you have awareness and a plan in place for if the business doesn’t meet its projected income in the short-term. You can also create and plot a more positive scenario where your business hits the ground running and takes the market by storm. This shows a great streak of idealism and the confidence to back yourself, something that every entrepreneur needs in spades.

If you ask people what made them successful, most will say they had a lucky break. I grew up with the school of thought that says, ‘where the harder you work, the luckier you get’. And to this day, successful people work hard so that does play a major part of success. But you can’t discount lady luck, just sometimes the clouds and stars align, the market is primed and you spot and maximise the opportunity to cash in. Lucky you ;-). Now go, go, go and work to capitalise on that break. Many would argue that it is this ability to finger emergent opportunities and then get resources in place to plunder it is what makes the entrepreneur an entrepreneur in the first place.

Timing is everything, so take heart… the best idea in the world may not fly if the market environment cannot support and sustain it. It could be that the technological advance is a step too far and consumers simply do not have the technical skills to use it at this point in time. This is one of the reasons why software companies tend to do so well. They seek to create gateways of change to herd their customers through. Lots of small incremental adjustments done through updates over a sustained time period and viola, most of their customers are then ready enough to step up to the next major product launch by the time it comes around.

It may be that the external environment you operate in (such as government policies and laws, major world events, and even mother nature) change overnight and all of a sudden ready flows of cash that looked like it had your name on it all of a sudden disappears back into someone else’s pockets. What do you do then? Well, that is where the lower scenario discussed above comes in. You batten down the hatches, you make what you can and concentrate on keeping the clients that are with you now happy throughout the adversity.


The first rule has to be a reminder… YOU DO NOT ONLY WORK FOR YOURSELF, you are in fact a collection agency for the government of the country you live in. No one is exempt!

Before you bask in the warming glow of clients monies sitting in your account there is a must do step! You need to take off all relevant sales taxes from your deposit and stick that into your business tax account.

In New Zealand, we call sales tax, GST (Goods and Services Tax); it adds another 15% onto the cost of your sales.  A good tip to determine the GST component of a final sales figure when working backwards is to times your sale price x3 and then divide that total by 23. That then gives you the amount to pop away in your tax account.  Of course when you are making the tax invoice you would take your sales figure and times by 1.15 to get the GST inclusive total to charge.  Depending on your GST cycle (mine is every two months), you then pay what you have collected on behalf of the government minus the GST content on what you have paid out during the same time. Sounds simple right ;-), but there are a few complexities that you need to get across.  Note: Not all businesses need to be GST registered. The threshold for GST registration in New Zealand currently sits at $60 000 in the last 12 months of trading. People who earn under this still may register if they chose to.

The next step (and this is still before you pay yourself) is to divvy up what is left of that client deposit into three parts. The first part is for the tax man, (yup the good old IRD again), the second is for the business, and the third is finally for you (and your partners if you are not a sole trader).

  1. Tax man (oops tax person)
  2. The Business
  3. You (and your partners)

As a general rule, I suggest you pop approximately (give or take through a rough calculation) 35% of all monies received into your tax account. This means that when it comes time to pay terminal tax (at the end of your first year of trading, it is there ready to go). But beware… this time is very tricky for businesses and it is here small firms can become derailed. For many businesses after the end of their first financial year they will be required to pay both terminal tax and then pay provisional tax (in effect this is a part- pre-payment of tax based on last year’s earnings) in short succession. So in this sense you need to over prepare to pay yourself across the first tax hump. From then regular payments make managing your obligations much easier. 

Provisional tax can put a significant dent into your cash flow so make sure you are generous and stay committed to filling up your tax account every time you get money through the door. This will avoid a nasty shock. NOTE: While a tax account can look like an easy pocket of monies for emergencies it is best to avoid that temptation altogether and simply lock it away until the IRD requires it. The game of paying back the tax account can all too soon fall apart as each deposit in requires a bigger and bigger contribution to cover the existent short-fall.

Right, phew, you have got the tax stuff covered in the first regard… you can now relook at that pile of money. Surely it can now be yours, the reward to your hard work. Well, kind of. The reality is businesses that are growing require additional resources. In order to keep moving forward and to keep growing, you will be buying more, you will be upgrading equipment, and you will be adapting and adopting new technologies. Your business will need a continual flow of income to be able to manage its growth spurts. By leaving a portion of your funds in the business, you are more likely to be able to get those additional resources as required. Keep that money in your operational account as it will also fund the outgoings as well (bills, supplies, utilities, etc.).

Finally, you can pay yourself. Now, I hear you protest, you have been reading lots of other stuff on the net where you pay yourself first! That’s not fair; I’m the one doing all the work! Well, I guess for the fly by the seat of the pants operator that is there to make a quick buck and then get the heck out, paying yourself first and leaving the cards to fall where they fall for the rest could work. But for the ethical business person who plans to be in business for the long haul and who is networking and building sustainable relationships with customers, clients, suppliers, and industry, Reputation is critical. If you don’t pay regularly it won’t take long for trade services and credit to be withdrawn. You will become or remain a cash account. This then makes cash flow management even tighter and trickier.

Why does paying your bills matter? Lots of cash flow management proponents state the way to stay in business is to delay paying your creditors as long as possible to ensure you have your money in the bank as so to stay liquid.  Yes, on an individualistic level, that makes sense. However, you are not just an individual, you are not even just a business, you live in a community and as such may have feelings about what responsibilities that entails. Did you know that paying your creditors on time is actually a critical component of a healthy economy. If you are paying your bills each 20th each month or as they become due (depending on contractual obligations), then that business that you paid has the money to also pay their creditors and staff. Those people then have money to pay their bills and buy the goods and services that they need and so the money cycle eventually recycles back into your pockets.

In a downtime, what often sends businesses under is that they run out of cash flow. People aren’t paying their business, so they eke into their cash flow reserves until such time it is all gone.  When it is gone, businesses don’t have the means to continue trading. In a small town, a business closing can be catastrophic! The business closes; say five workers are made redundant as a consequence. These workers then need to look for new jobs, when none is found in the town, this could mean that these  families have to pack up to  shift someplace else to go find work. The money that these families used to spend in the community has now also shifted elsewhere. When a small town loses residents then there is less demand for goods and services. If you don’t have as many customers and less demand then the remaining businesses could also be looking at a downturn. It becomes a sad spiral seen in little towns all over the world. Before too long the hospital is closed, the last gas station has pulled out, and the post shop is quietly working to put their stamps into the corner store so it can leave in the middle of the night to avoid protest.

This decay and displacement feeds itself into the economy as a whole, unemployment grows and more individuals and families are forced to access help to survive.

What is immensely unfair is that there are many big businesses in our economy that routinely use small businesses as their bank rolls. I guess they subscribe to that theory that the business of business is business and therefore nothing is personal, because it is business!   Hmmm, hang on a sec! These types of corporations make it a routine practice to put clients on a 60-90 day cycle before paying despite what the contract might say. They get away with this practice because they hold a dominant position in the market and people who want do to business with them are forced to agree to their terms.

This puts significant cash flow pressure on small and medium size businesses as they have to wait for their (often  major) clients to pay while still having to maintain enough liquidity to pay for their staff and own 20ths. When you are a small business, it is quite easy to be bullied as these companies can choose to walk away from your preferred payment requirements and say take it or leave it. If you do decide to acquiesce to the delayed payment option then you will need to put more aside for the business than the rough guide given above. However, we can explore this more in a future post.

So with all this (dis)heartening information, where do you go from here? Well, the first must do is get yourself some accounting software. In this day and age there simply is no excuse for not knowing where your business is at financially at any given moment. Technology can take care of our point of sale, our inventory, our re-ordering, and help support us to know where our business is financially. Products like MYOB,  Xero , and many others offer free trial periods and very reasonable monthly subscriptions through cloud based services. You then have access to their support team for help to set up their systems to your business needs as part of that subscription. Great! Expert advice and often an designated account manager on tap, helping you!

Regardless of what you choose, Accounting activities can no longer be considered a post-match analysis of what your business has been doing. In this fast changing and dynamic, explosive globalised business environment you should be looking for a blow-blow play of what is happening in your business as you go about your daily activities. This makes budgeting and monitoring of expenditure seamless and ensures that you have up-to-date information to support your decision making.

Another idea is to go to your accountant (or one that someone has recommended) and ask them to help set up the accounting side of your business. They will recommend systems they prefer and set you up so when it comes to reporting and tax obligations they don’t have to spend as much time working through your finances. This then saves you money.  Another good place for free advice is IRD. They have excellent online resources and their business team members are great to deal with on the phone.

Remember: the quicker you can record and report your financial figures (this often means technological integration) the better equipped you are to make sound business decisions.

The last piece of advice I proffer is to actually bone up on your financial literacy. The most loudly heard and frequent complaint I hear about people’s schooling is there wasn’t enough budgeting, cash-flow management and other practical financially literacy information taught.  Research shows that more financial literacy is needed.

While I know time is precious and scarce for the emergent entrepreneur, a lack of knowledge and clarity in managing finances can be a game changer. Signing up and sticking with that free online course or local high school night course could be one of the better decisions that you ever make.


Please leave me a comment and let me know what your worries and experiences about cash flow management are.