So, you have just completed your cash flow review and you’re wondering what to do next. First, we suggest you avoid the temptation to fix yourself a strong drink (although we can also understand that you might well feel an overwhelming urge to do so).

We are going to briefly explore here what to do with your cash flow once you have completed it. But before we work out how to use it, we should discuss exactly what a cash flow statement is and how it is different from a budget or financial performance statement like a profit and loss (P&L) statement.


What is a cash flow statement?

Simply put, a cash flow statement is a statement of what money is coming into the business and what money is going out of the business. Importantly though, it shows when in the future those events will take place. This allows us to plan how much money we need to meet our expenses in a timely fashion or to take corrective action if that is needed.


How is a cash flow statement different from a budget or P&L?

A budget is usually calculated with several assumptions and is generally a forecast based tool. It is useful and you should absolutely have a budget, but it does not help greatly when it comes to cash flow. In most cases, your budget will forecast sales and expenses on a month by month basis for a maximum period of 12 months – usually a financial year. A budget will help you plan for new acquisitions in an overall sense.

For example, you may wish to expand your practice and take on an additional room. Taking on that extra room will create additional expenses and your budget will help you to know what you can afford to pay for the room and what yield you need to get back from the room in terms of an annual estimate.

A cash flow, however, will help you work out at what stage of each month the rent has to be paid, and when you can expect to receive the revenue from that room.

A P&L (profit and loss) statement is a historical statement of overall expense and revenue performance. It is useful for knowing how the business has performed in the last period (month, quarter, year and so on). It is also useful for comparing against the performance of previous years.


So, what are the key components of a cash flow?

As you have probably guessed from reading this far, the primary component of the cash flow is pinpoint accuracy. That means with every value we enter, we are aiming for as close to the bullseye as possible. Accurate information on expenses is easy enough to locate. In order to complete an accurate cash flow, you will need the following things:

  • Details of every expense:
    • What the expense is (e.g. rent)
    • How much it is and when it gets paid (e.g. $3,000 per month)
    • When it is due to get paid (e.g. 20th of each month)
  • Details of expected income:
    • What the income is (e.g. psychology services delivered by contractor)
    • How much it is going to be (e.g. based on how many expected bookings the contractor has for the month)
    • When the money is likely to come into the account (e.g. is the bulk of the work EAP which will be paid in the following month?)

As you work your way through every expense and every income type, you will eventually end up with a complete monthly cash flow statement which will show you when your money arrives and when it is due to go out. Most importantly it will tell you in which order those events take place.

For example, in some cases a business might not be likely to receive income before some or all of the expenses fall due. This means the business will need extra money to meet its expenses when they are due. This might mean using an overdraft, injecting directors’ funds or a loan structure of some sort. The cash flow, when accurately completed, will create a list of things you need to plan and prepare for in a financial sense.


What do you do with the cash flow when it’s done?

Well let’s start with what you don’t do with it. What you don’t do is ignore it and hope things get better. You also don’t stare at it waiting for it to magically change. The cash flow statement tells you where the risks and challenges are. It makes sense then to look at those things the cash flow statement is pointing to. There’s an old saying that applies nicely here; “when a finger points to the sky, only fools look at the finger.”