Cash flow in your business is like the fuel in your car, without it you won’t get too far down the road. 

We explore why cash flow in your business this week, why it’s important, how it can make or break your business and most importantly what you can do to improve the cash flow in your business.


  • The importance of cash flow in your business
  • The problems that can be caused by not having a cash flow budget and proper cash flow management in your business
  • Why you can show a profit but have no cash flow in your business
  • The importance of understanding your working  capital and cash flow cycle
  • Ways to improve your cashflow and working captial cycles
  • Why all types of business need to understand cash flow
  • The difference between a normal budget and a cash flow budget
  • Why the banks will ask for a cash flow budget when lending money



G’day, g’day to you and welcome to the ‘Business Made Easy’ podcast, where
we make business easy. Jason Skinner, your host here for another week and
if you’re just joining me this week, thank you so much for finding me. I’m glad
you’re here and if you’ve been following me and following the show, and
enjoying the show and subscribe to the show – then thank you too, for all that
you’ve been doing. And particularly those leaving reviews on iTunes and a
few of you have been in contact with me to let me know about the show, by
all means, please do that. It’s how the show’s going to grow and how I can
keep bringing it to you each week. If you are getting value of the show, by all
means, please let me know over on iTunes by leaving an honest review.
We’ve got a great episode this week, we’ve been covering a little bit over the
past few weeks on the growth of business, or not so much, how to grow your
business and also the importance of financial statements. Keeping track of
that growth in your business and that was episode 12 where we talked about
the five things of how you grow a business. And then I gave you the tools and
the calculator there to work out how to grow your business.
But in episode 16, we spoke about the importance of profit and loss and
financial statements. Which tell you how your business is going, in terms of,
making money. Are you making money or losing money? And those sorts of
But this week, we are going to go one bit further into an area that I am
extremely passionate about. And it’s probably one of the most important
areas of your business and that is the area of cash flow. And whilst it’s one of
the most important areas, it’s also one of the areas that 99% of people don’t
look at properly. Or don’t understand how to look at it. It really is a relevant
topic for you and your business and the health of your business and the
longevity of your business.
And I’m going to talk about some examples, I like to always give a story.
Whilst the facts are true, they are from case studies that I have helped people
with. I do change the names to maintain that confidentiality. We’re going to
talk about some fictitious people today, called Danny and June and I’ll go
through that with you, a little bit later.
What do we mean when we’re talking about cash flow? And I’m going to give
you an analogy because I think it helps you to understand exactly what we
mean by cash flow. And the first thing is, to understand is that we’re talking
about money in your bank. And I think we all agree that money is pretty
important, because, well it’s really important because we’ve got to be able to
pay our bills. And we want to eat and provide food, put food on the table,
we’ve got to pay taxes, we’ve got to pay our rent, we’ve got to pay for our car
registration and licensing.
There are so many things that we have to put money to every single day of
the week, and that’s cash, cash flow. Cash flow is the money coming into your
bank account and going out of your bank account. And I’m sure you will agree
that that’s super important. Here’s an analogy for you to think about it, in
your business. And what I want you to do, is think about the size of your
business being the size of your car. You’ve got your profit and loss statement,
that we talked about back in episode 16 and you know now that your profit
for the year is X dollars. Let’s call that the size, that equates to the size of
your car. If we’ve got a little four-cylinder car, we might just be starting out in
business and we’re only just turning over a little bit of money. We’ve only just
got a bit of traction going. We might only be making a smallish profit, at this
particular point in time.
And we mightn’t have a lot of assets and equipment and things like that, or
stock. We mightn’t have a lot of that stuff at the moment, because we’re just
starting out. We might be a consulting business or, very smallish sort of car,
let’s call that our ‘4 cylinder car’.
And then you might have a larger business, where you’ve got employees
you’ve got to pay each week. And you’ve got lots of plant and equipment,
machinery. You might have trucks or forklifts or stock that you’ve got to keep
on the shelves. Let’s call that a larger car, that’s our ‘big F250’, that’s a big
beast of a car with 12 cylinders and whatever, I’m not really good with
mechanics, sorry. You get my drift though.
We’ve got our smallish car and we’ve got our large cars, and then we’ve got
every other car between there. Well, as you know with a car, it takes petrol to
get you from A to B. If we go and buy a brand new car, if we buy a car today
and we jump into the driver’s seat at the dealers, where we bought the car
from. Well, if it’s got no petrol in it, we’re not going to get out of the car yard,
are we?
We need petrol in the tank, and the smaller the car, we don’t need as much
petrol. But the bigger the car, we need a lot more petrol. And I want you to
think of that as cash flow. Think of that, petrol that you put in your car as your
cash flow. And the size of your business is your actual size of your car.
Cash flow, we need petrol to go places and cash flow is the same in your
business. You can’t get too far down the road if you don’t pay your rent if you
don’t pay your staff, if you don’t buy your stock and pay your suppliers. You
won’t get too far down the road. Not only that, if you don’t have good cash
flow, you can’t pay your taxes, you can’t eat, there’s no food on the table. You
can get the drift.
The cash flow is like the petrol in your car and what actually happens is, when
we run out of cash flow, we need to go to the, or fuel for our car, we go to the
gas station. And we get gas and we fill it up and we go again for however
many kilometers. And in your business, it’s exactly the same. It’s how long,
does it take to keep replenishing the cash flow in your business. That’s an
important thing that we want to know. And that’s what we call our ‘working
capital days’ and without getting too technical about that, what we’re talking
about there is, if we get a dollar out of our bank account and we invest it into
our business. We buy some stock, we pay our employees.
How long does it take for that cash, if you like, to get, what we’ve invested
with that cash, to get sold to a customer? And then how long does it take for
the customer to pay us and put that money back in our bank account with
some profit? If we invest a dollar, then we want to be getting $1.50 back from
our customer. But we want to be getting it back quite quickly. Because the
longer it takes to get that money back in, we need more money to keep
paying the bills and that’s where this cash flow comes into it. We need to
analyse what we call our ‘working capital days’, how long does it take to get
that money back in?
I’m going to take you through that today and I’m going to show you why it’s
important, as I’ve just illustrated there, in terms of the fuel in your car. It does
affect your business because I’ve seen lots of businesses where they’re
actually quote profitable. They actually make good profit but they don’t have
any cash flow. They’re not structured correctly, and they’re not collecting
their money from their customers fast enough. They might be carrying too
much stock, they haven’t got the fuel in the tank and it’s too far to the next
service station, to be able to get enough petrol to keep going forward.
Even though the car’s getting bigger and it needs more fuel, the business just
isn’t generating enough, the petrol stations aren’t close enough to be keeping
that business afloat. And then what happens then is, basically, they can’t pay
their bills and then suppliers stop paying and then the landlord gets angry.
And then the tax man comes knocking and the IRS and it all just compounds
and snowballs from there.
Really, really, I think you can see from there that it really is a major
fundamental part of your business, that you really want to get right. Today,
I’m going to teach you about that. I’m going to show you where it can go
wrong and what to look for. And I’m also going to show you how to monitor
and fix any cash flow problems, as well. And if you stick around at the end of
the show, I will have some, I’ll go through some things that I’m going to
announce for you that are going to help you with your cash flow. They’re free
things but they’ll be things that you can take away and really learn, hang
around for that at the end and I’ll give you those freebies, as well.
Let’s start with a case study though, and I want to talk about Danny and June.
Now, Danny and June came and saw me because they had bought a business,
and when they bought a business, they bought an established brick and
mortar business that actually required the selling of physical products. And
these, what I’m going to tell you here applies whether you’re selling physical
products or not, but in Danny and June’s case, they were selling physical
They had premises, they bought a business, it had a lease with a premises.
And they had physical product so they had to buy stock etcetera to keep
running this business. And they took out a loan from the bank and the way
the loan was structured, it was going to be repaid over 15 years, and it was
going to be $2000 a month. They were going to pay down on this loan, now,
of that $2000, some of it was interest that they were paying to the bank for
the use of the money. And the other $1500 was actually to pay down the loan
that the bank had given them. The bank said, “Look, we’re going to give you
this money. We’re going to charge you interest each month. The repayments
are $2000 but I want $1500 to be reducing down off that loan every month.”
And to top it off, the bank also gave Danny and June an overdraft or a credit
line facility of $25,000 that they could use for emergency purposes. If they
got down the track and they ran out of cash, for any reason, or couldn’t pay
their bills for any reason. They had this $25,000 emergency line of credit
slash overdraft that they could use in their business, as well.
Now, where it went wrong was, Danny and June didn’t do any cash flow
planning around this at all. They had looked at the financial statements of the
business and they had worked out that the business was making a profit each
year. But what they didn’t do, is they didn’t sit down and work out a cash flow
budget. And I’ll talk about what a cash flow budget is, shortly but they didn’t
sit down and plan where the money was going to come into the business and
when. And they didn’t plan where the money was going out and when.
They really just thought, “We’ll be right, it’s making profit. We’ll just pay the
loan repayments.” And that’s really where they went wrong because they
didn’t have an understanding of their working capital cycle. Now by the time
they came to me because what happened, they started trading, they bought
some stock, they had to pay their suppliers for the stock. And the stock came
in, then the stock sat on the shelf for a little while, so it didn’t sell straight
away. Some of it did, but they weren’t really moving it that fast.
But the rent still needed paying, and when they did sell stock, they had to buy
more stock. But they also weren’t collecting the cash from their customers, at
the same time. So they were allowing their customers to pay them within 30
days or on terms, on credit terms. What they were effectively doing was
buying the stock, paying for the stock and then waiting 30 days to get the
money back in their bank account.
Now, you can understand that there’s a gap there. They need petrol in their
tank, which is the cash flow and what they ended up doing was, and of course,
the loan repayments were due, they were $2000 a month. They ended up
dipping into the $25,000 emergency fund because they didn’t have any other
money to do it. And the business wasn’t generating enough cash flow to help
keep up with the bills that were going out.
When they came to see me, they were going, “This is just not working. We’re
making, we’re showing that we’re making a profit on our books. So when I do
the financial statements, it does show that we are making a profit.” But as I
explained to them, “You’re making a profit but the profit isn’t coming into the
bank. The profit is actually out there in the marketplace, your customers are
taking time to pay you, so there’s money out there owing to you from there.
You’ve invested money in stock, so you’ve got stock sitting on your shelves,
that you might be carrying too much stock. So you’ve got cash that’s actually
invested in that stock and you might be paying your suppliers, at the time
they invoice you. Straight away, so you’re not actually paying them on terms
but you’re letting your customers pay you on terms.”
You can see there, that there’s this whole compounding problem. And to top
that off, when you pay principal down on a loan, that has to come out of your
cash flow. When you pay that loan down, that’s coming out of your profit. So
if your business is not generating, as I said, their principal reduction was
$1500, before the business even looks like having to pay them some money
to live on, it has to generate at least $1500 of cash to be able to reduce that,
out of profit, to reduce that loan down.
This is why a plan is so, so important. A cash flow plan and a cash flow plan is
different to an actual budget, where you budget for a profit/loss. And again,
I’ll explain that very shortly but what I did with Danny and June, is I sat down
with them and I said, “Okay, Danny and June, let’s have a look at what’s going
on there.” We worked out how many days from ordering their stock to paying
for it, it took. And then we worked out once their stock arrives, how long does
it sit on the shelf before it’s sold. And then once it’s sold, how long do we have
to wait until we get our money back in our bank account.
It turned out, it was something like 60 days from the very first day that the
money left the bank account till the day that the money came back into the
bank account. And actually with some profit attached to it, so 60 days they
were waiting, 60 days they’re paying rent, they’re paying all sorts of
overheads. They’re trying to live, they’re paying loan repayments. 60 days is
two months, so that’s two months worth of $1500 that they’ve had to pay to
their bank, to pay off their loan.
It was no wonder they were dipping into their emergency reserve of $25,000
and now they were paying interest on that, as well. The cash flow cycle for
them was really, really bad. We sat down and we worked out, worked out
ways that we could. Firstly, we did a cash flow budget and we worked out
exactly what the year would look like and when things were going to be tight,
and when we were going to have extra cash. And we also worked out ways
that we could improve their cash flow.
How could we have the stock sitting on our shelf for less time? Was there a
way we could contact our suppliers and see whether or not they could deliver
to us, just in time? Toyota was very big at this, they actually initiated this just
in time ordering, so that they didn’t have working capital on cash flow sitting
on the shelves, waiting to go onto cars. This is the same for Danny and June,
how can we get our stock, just in time when we need it? How could we
improve the customer payments? We actually, was it worth us offering an
incentive for the customer to pay cash on delivery? Or do we, was there an
opportunity to cancel account payments in total.
I mean, you pay for your groceries before you leave the store, surely we could
explain to our customers that they needed to also pay. These are all things we
worked through with Danny and June and then we also, as I say, worked out a
cash flow budget and took them through that exercise, to see exactly where
we were going to be needing more cash or where we had surplus cash and
was there enough cash flow there to actually maintain and operate the
And doing so too, also helped Danny and June to work out exactly how much
they could take out of the business to live on, as well. Because that’s an
important thing, it’s a common question I get asked. “Hey, I just got this new
business. How much can I pay myself or as a salary to live on?” Well, hang on,
you’ve got to pay all these things first, so that’s important to work out a cash
flow projection there.
Now, cash flow and cash flow statements and budgets, cash flow budgets,
they apply whether or not you’re in an online business. Whether you’re a
farmer, whether you’re a brick and mortar type business. Whatever business
you’re in, you really do need to have a good cash flow budget. And I’ll give you
an example, with a farmer, for instance, a farmer’s cash flow might only
happen seasonally through a year. They might plant their crops in late winter,
early spring and then the crops grow through summer and it mightn’t be, so
they’ve had all that time they’ve been buying seed, buying fertilizer, running
tractors and plows and paying staff etcetera. But there’s no money coming in
because the crop hasn’t grown yet. They can’t sell, if a farmer hasn’t got a
crop, he can’t sell it.
And then, all of a sudden, they’ll get a big rush of cash when it comes to
harvest time because all of a sudden the crop gets harvested and gets sold at
the markets. And then the cash starts coming in, and they’re cash-rich again.
Now if they spent all that money when they got the cash in, then they
wouldn’t have the money then to carry them through to the next season.
You can see the importance of cash flow there, and again, keep thinking of
that fuel in your car. If you’ve got excess fuel in your car and you just dump it
out and let it evaporate, the time that you need it, instead of storing it, you
could be doing yourself a disservice there.
And if you look at a manufacturing business, they buy raw materials. They
might buy steel or sand or whatever it is that they’re making and nuts and
bolts, and all sorts of things. You buy that, if you buy too much of it for the
amount that you’re subsequently making and selling, then that’s just going to
sit on the shelf and again, tie up in cash flow and put cash flow pressures on
your business. And that’s why it all needs to be monitored.
Online businesses are the same if you’ve got an online business and you buy
20,000 skateboards from Ali Baba and you go and house them at Amazon
FDA. And it’s just sitting there on the shelf and you’re not selling them, that’s
cash flow tied up in products on shelves and you’re paying to advertise, you
might be advertising on social media. You might be paying fees for freight to
get, there’s a whole host of costs that go into it. It applies to online
businesses, physical businesses, cash flow. You’ve heard the saying probable,
“Cash is king” and it truly is king. Because without it, you’ve got an empty
shell, you’ve got a car with no petrol in the tank and that’s the critical point to
make there.
Understanding about cash flow and understanding why it’s important to your
business, we don’t want to say, “Well,” you’re probably wondering what’s the
best way to fix it then.” I mean, “How do I work out what my cash flow is in my
business?” And the way we do it, there are several ways. By far the easiest
way for you, and best way is to, the most practical way would be to do a cash
flow budget. A cash flow budget is different from a normal budget, because of
a cash. A normal budget tends to just look at what’s my sales, what’s my
projected budgeted sales and what is my, what are my expenses? And that
gives you a profit and loss. So that’s a budgeted profit and loss.
But a cash flow budget is a bit different because it goes a bit further to say,
“Okay, this is my profit and loss. These are the costs that I’ve got to pay for,
but I also have to pay tax. And I also have to pay my loan repayments to the
bank and I also have to pay for some new plant and equipment at some point
in time. Or I might have to, I might want to take, you definitely need to take
into consideration your drawings, your living that you’re taking out of the
business as well.
Cash flow is looking at everything, all the cash coming into the business and
the cash going out. And what we want to look at, at the end of the day is, what
is the bank balance difference between the start of the year and the end of
the year? And we want the end of the year to be a lot higher than what it was
at the start of the year. And if your cash flow is right and you’ve taken all
those other expenses, such as tax and loan repayments and paying your
suppliers and collecting money from your customers, you’ve taken all of that
into consideration. You should have more money in your bank account at the
end of the year in your business than you do at the start of the year.
And I can, if you send me an email to [email protected]
actually, well you can send me an email but I’ll also put a cash flow template
up on the show notes, to help you as well.
The other thing is, you can also go to, there’s software available that bolts
into your accounting programs. I think a lot of you might know, I use Xero, is
my preferred accounting, online accounting software. I have a program that I
can do an analysis of your cash flow for you, so if you need a hand working
out your working capital days and those metrics that I was talking about,
drop me an email to [email protected] and I’ll have a look
at that for you and make sure we can work out your working capital cycles.
And just see what’s going on in your business, as well. There is analytical
software that does actually analyse your financial statements and report
back what your cash flow’s doing.
Don’t underestimate the, just one point on this, don’t underestimate the
importance of collecting your money sooner on your cash flow. One day, I’ve
seen instances where two or three days just make a massive, massive
difference to the bottom line of the money that’s in your bank account, at the
end of the year. Where I said before with Danny and June, it was taking 60
days to get their money back in. If we can improve that by two or three days,
that makes a massive difference in the bottom line of their bank account.
Don’t underestimate, don’t just go, “Oh, it’s only two days, it won’t matter.
Won’t make a difference.” It certainly does make a difference and if you drop
me a line, if you need a hand with that, I’ll certainly have a look at things for
you to see what we can do to improve those collection cycles.
But the main thing is, is that you understand it and you understand why cash
flow is so important and understand what your cash flow is doing in your
business. Because it might be exactly why you are currently feeling like
you’re doing all this work, you seem to be making profit but there’s nothing
sitting in the bank account. And that’s one of the things that people say to me
all the time when they come in. If I say, “Oh look, you’re making a profit of, say
$100,000.” They go, “Well I don’t have $100,000 in the bank. Where is it?
There’s no way that can be right. I don’t, I’m not even, I’m hardly living.”
It’s important to understand where all that cash is going and where it’s
leaking out of your business, and it does leak out if you don’t keep an eye on
it. Definitely do that, as I said, I’ll put some resources in the show notes as
well. Because there’s plenty of work we can do around there. And I’ll also put
some fact sheets there of ideas around improving your cash flow, how you
can improve your cash flow as well. Because that’s, so I’ll put up plenty of tips
over there and you can go over to those show notes. If you go to I’ll make sure that I’ve got
plenty of resources over there, in the show notes to help you understand
better your cash flow and what’s going on in your business.
As I say, if you want me to actually do some more, deeper analysis of your
business, I can certainly look at it, with our software and do some modelling
for you around ways you can improve that as well.
It might seem difficult to start with, getting your head around all that. I really
hope I’ve explained it clearly and in a way that’s meaningful. But don’t
underestimate the importance of it, cash flow in your business is king and you
need to be, at the very least, doing a cash flow budget. And that’s the reason
why banks always ask for it when you go to borrow money too. The banks
always ask you for a cash flow budget because they want to see that you can
repay the loan that they’re going to give you. They want to see that your
business is going to be good for the money that they’re lending you. That’s
why they always ask for a cash flow budget not just a normal profit and loss
Critical to get that right. And whilst it will seem difficult to start with,
persevere with it and start getting a really good understanding of the cycles
in your business with your cash and you will jump in front of that. And you
will see that, I mean business is a moving target, it’s moving every day. Sales
happen every day, customers come and go every day, you need to jump on it
ASAP too, if you aren’t already, to make sure that you are doing that.
The other thing I’m going to do, and I just thought of this actually while I was
putting this episode together, and I think it will be helpful because I do want
to help you get a grasp of this. I’m going to put together a free educational
training on how to do a cash flow statement. What I’ll do is I’ll do a YouTube
tutorial and, with a worksheet and we might do a case study and work
through it and I can show you then how to do that.
If that’s of interest to you, best to go over to the show notes and I’ll have a
link over there called ‘Free tutorial signup.’ If you go over there and put your
details in there, I’ll make sure I contact you as soon as I get that out. I’ll
probably do that over the Christmas break and we can start the New Year
with a fresh cash flow. Probably a good time to do it, going from January to
December. If that’s of interest, I’ll put a link over in the show notes as well
and I’ll contact you as soon as that’s free and we might jump on a webinar or
I’ll do it as a tutorial. That way we can continue using it and help you out
In summary, cash flow, it’s critically important to your business. I hope you
can see now, just how important it is and why. I hope those ideas that I’ve
given you there, also help you because, as I say, it is an important area of the
That’s all I had today for you if you haven’t already joined our Facebook
group. Then, by all means, jump over and do that. You can do that by clicking
on, in Facebook and going to, and typing ‘Business Made Easy’ podcast group
and I’d love to see you over there. It’s a free group, lots of people talking
about various things in business. We can talk about cash flow over there as
well, I’m in there regularly. The best way to do that is to go to, as I say,
Facebook and in the search bar, type in there ‘Business Made Easy’ podcast
group and it’ll come up there. But come and join me over there.
If you haven’t already, make sure you subscribe to the show on iTunes if
you’re finding this of value, so that you get the show each week. I put these
out every Friday, they are free. They’re a free resource to help you in
business because I’m passionate about business. And you can check out a
whole heap of stuff over at the podcast website, as well, which is
Thank you for your time, I really appreciate you listening and I hope it’s been
of benefit to you. I really love bringing you these tutorials because they are so
important to your business and making sure you get a better business life and
that’s what we’re all about. That’s it from me this week, I am going to, we’ve
got a great episode actually coming up next week. I’ve got an interview, we’re
going to be talking with a guy, I just love the work he does in website design
and just does some amazing stuff and I won’t spoil it too much now. But join
me next week for that episode, that’ll be episode 18.
But until next week, I’m going to hand you over to Mia now, she’s going to
take us home and here’s to your success. All the best, bye




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