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Managing Your Business Cashflow

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We are going to discuss ways of managing your business cashflow so you don’t get caught out during a downturn or quiet period such as Christmas.

No one has ever gone broke by having too much money in the bank, however, if you have $1,000,000 cash in the bank but your weekly operation expenses are $1,000,100, then how much cash do you really have?! Businesses make this mistake all the time, they spend the cash without knowing or understanding their expenses, which is why managing your business cash flow appropriately is something that cannot be overlooked. We are going to help you understand and provide the formula to calculate your working capital position by using the below example, so you can identify your exact weekly expenditure;

Notes:

  • Divide the Real business Expense (Table 1) $4,000,000 by 52 weeks = $76,923 (weekly operating expense)
  • Then divide Working Capital Position surplus (Table 2) $750,000 by $76,923 = c.10 weeks (2.5 months)
  • Cash reserves are sufficient to support 10 weeks operating expenses.

The above example has a healthy cash balance of $500,000, when compared to their weekly operating expenses they only have enough working capital to support 2.5 months of trading. Before we can help you with managing your business cashflow, you need to understand your working capital position. Next we will show you ways you can grow your business without spending your working capital, while increasing your business cashflow to help in a downturn.

We want to show you some benefits of financing equipment while increasing your cash flow, instead of purchasing equipment with working capital during industry slowdowns such as Christmas. Please refer to the below examples;

Some questions to think about before paying cash;

  • How long would it take your business to generate $500,000 net to replenish your working capital?!
  • How long are your debtor payment terms?!
    • Historically, if you and your staff take Christmas off and you are on 30 day payments terms, there is a chance you might not see any income until mid to late February 2024.
  • What are you weekly expenses?!
  • What expenses do you have coming up?!
    • Staff Christmas Holiday Pay.
    • September Quarter GST Payments – Due November 2023.
  • The real question you need to ask is, can your business afford to spend $500,000 cash right now from working capital?!

Example: Borrowing Funds to Purchase

Please note: the monthly finance payments are for this example only.

Arrears payments will equate to est. $40,000 over the period, whereas advance payments will equate to est. $50,000 over the period.

  • By financing your new truck, your business can retain c.$450,000 net cash which could help cover your upcoming expenses during the Christmas downturn.

The above examples are to help you decide which purchase option would best suit your business financially. Whether you are paying cash or borrowing funds, an added bonus towards your cashflow is purchasing this year vs next years as you can claim the GST on your equipment. Using the above $500,000 purchase price, you can claim $45,454 (GST) in January 2024 which can help boost your cashflow while you wait for February’s income.

Leading into summer there are c.100 hours of daylight per week, this means the Christmas period is usually one of the busiest times of year for our clients. This is great for cashflow however we all need to start thinking about what happens after the Christmas rush. Once the Christmas freight has slowed and construction projects stop for a couple of weeks cash flow can quickly dry up.

Continuing on with managing your business cashflow, we recommend starting to conserve cash now. Even if trading conditions are good, tighten the belt and reduce spending where you can across the organisation. 

You have most likely planned for the next 5 weeks of Christmas Rush, but have you planned your January and February? If not, start now!

Some items to think about Pre-Christmas so you are prepared Post-Christmas should be:

  • What are my daily expenses and do I have enough cash coming in to pay all bills?
    • Are my receivables being paid within terms?
    • Are employees taking extra leave and will that effect operations and income?
    • What tax liabilities will fall due and how much will they be?
    • What employee wages will fall due and how much will they be?
  • Do I need to replace or add any equipment for upcoming work over the Christmas period?
  • If yes, conserve working capital by financing equipment.

As mentioned before, another approach for businesses with strong work flow leading into Christmas is for them to purchase additional/upgrade your assets to capitalise on the work that’s available and generate as much revenue as possible whilst also locking in some big GST returns early in the new year to assist with the lower-than-expected cash flow. 

Chevron Finance proudly supports those across Brisbane, Melbourne, Sydney, Perth and wider Australia with reliable machinery finance solutions, founded on flexibility and transparency. With over 20 years of experience in the field, we are backed by the expertise and insights that allow us to provide best-in-class, tailored solutions to our valuable clients. Chevron Equipment Finance was established to provide a more personalised service to meet the needs of growing small and medium businesses that have been under-serviced by their bankers for years. We pride ourselves in acting with a sense of urgency in everything we do and our can do culture ensures service and results we can be proud of. https://chevronfinance.com/

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