The Hidden Costs of Poor Cashflow Management
Cashflow is the lifeblood of your business. Yet even profitable companies can find themselves struggling to pay bills, cover wages or invest in growth because of poor cashflow management.
According to new research from CommBank, almost 80% of Australian small and medium businesses experienced cashflow strain in the past year. The most common causes were declining revenue, low cash reserves and seasonal fluctuations.
These problems often don’t appear overnight. They build slowly, showing small warning signs that can easily be missed until things become critical.
The warning signs of a cashflow crunch
Watch for these early red flags:
Late customer payments. When invoices drag out beyond 30 days, cash inflows slow, even if the business looks profitable on paper.
Rising operating expenses. Wages, rent and supplier costs often increase before revenue does.
Seasonal dips in sales. Relying heavily on peak periods can make quiet months hard to survive.
Using personal savings. Dipping into your own money or skipping your own pay to cover shortfalls is not a long-term solution.
If these sound familiar, your business could already be under cashflow stress.
Know your true cash position
Understanding where your money is going is the first step to regaining control.
Review the past 12 months of financial data and ask yourself:
How reliable are my incoming payments?
What percentage of income is tied up in unpaid invoices?
How much goes to fixed costs like wages and rent versus variable costs like supplies?
Formula:
Operating Cashflow = Cash Inflows from Sales - Cash Outflows for Operations
This shows how much cash your core business activities actually generate. If the number is negative for several months, your expenses are outpacing your income.
Common mistakes that drain cashflow
Even experienced business owners fall into these traps:
Confusing profit with cash. A business can be profitable but still have no cash if customers pay late.
Not holding a buffer. Without 2 to 3 months of expenses in reserve, small setbacks can cause serious strain.
Growing too fast. Expanding too quickly ties up money in stock, staff or equipment before cash comes in.
Loose payment terms. Being too flexible with customer payment deadlines can hurt your cashflow.
Practical ways to protect your cashflow
Here are simple, effective steps to keep your business cash healthy:
a. Speed up payments
Send invoices as soon as jobs are complete. Offer early payment discounts and set up automated reminders in your accounting system.
b. Build a reserve fund
Aim to hold at least 2 months of fixed costs in a separate savings account for emergencies or quiet periods.
c. Review expenses regularly
Go through supplier contracts, subscriptions and utilities every quarter. Negotiate better rates or cancel unused services.
d. Forecast every month
A rolling 12-month cashflow forecast lets you plan ahead and spot shortfalls early.
Simple forecast formula:
Cash at Start of Month + Expected Inflows - Expected Outflows = Cash at End of Month
e. Ask for expert help
Your accountant can help you interpret the numbers, plan for seasonal changes and improve your financial systems.
What you can take away
Cashflow issues can impact any business, regardless of size or profitability.
Late payments, rising costs and seasonal dips are often the first warning signs.
Always know your true cash position using a simple cashflow formula.
Build a cash reserve and update forecasts monthly to avoid surprises.
Seek professional advice early to protect both your business and your personal finances.
When you treat cashflow management as a strategy rather than a reaction, you put your business in a stronger position to grow and adapt to changing conditions.
The bottom line
Cashflow problems are not just about money. They affect your focus, your ability to make decisions and your confidence to grow.
At Inspired Accounting, we help businesses build cashflow systems that work, not just for tax time but every day.
Important Note:
The information provided in this article is general in nature and does not constitute financial or tax advice. This information has not been prepared taking into account your specific objectives, financial situation or needs. Before acting on any information in this article, you should consider its appropriateness to your circumstances and consult with a registered tax agent or financial advisor.
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Inspired Accounting helps ambitious businesses achieve their growth goals through proactive accounting strategies and clear, actionable advice.
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