Please don't run out of cash

Cash Management – 5 Simple Steps

How do so many businesses fail because they run out of cash?

Maybe they didn’t have enough cash reserves to begin with.

Most often its because they were looking in the wrong direction.

You’re a small business owner

Having enough cash available is a regular, if not constant, concern.

How much peace of mind would it give you to know you were in control of your cash position; on any given day of the week?

I don’t mean what your bank statement says.

I’m going to suggest FIVE SIMPLE STEPS you could take to give you that control, and the peace of mind that goes with it.


Well actually, I mean “Always pay your employees, their payroll taxes, their Super, your sales and other taxes on time” !

Why? Well if you don’t:

  • you won’t have any staff in your business
  • the tax authorities will start wasting your time with enquiries and audits
  • you might end up with fines and penalty interest to pay
  • your credit rating may suffer and in the worst case….
  • you could end up being ‘wound-up’ and out of business

So – Pay your taxes!

It can be easy to overlook some of these obligatory payments and their timing. Sales tax is a classic…. you have to pay it over, maybe on a quarterly basis. You think you have it covered, there’s money in the account – all good.

Only when the payment date comes along – you realise that you’ve just paid for some more stock, and your favourite customer is late in paying his invoice – and now don’t have the funds to pay your taxes. Damn!

Simple Steps 1:

  1. Create a separate bank account – A number 2 account.
  2. Transfer all your tax obligations into this account – your sales tax, your payroll taxes and Super, your business taxes.
  3. Use this account to pay all these taxes, and ONLY THESE TAXES, on the date that they become due. EASY!

Now, when you’re checking the balance on your number 1 account, the account where you do all your day-to-day transactions, you have an accurate picture of the funds available to buy more stock (for instance).



Even if you’re a sole trader rather than a company.

All business owners need to take money out of their business. That’s why you’re in business, right?

But using your business funds as if it were an extension of your personal money is problematic.

It will give you a misleading picture of both your business AND personal finances.

The slow drip-drip of coffees, bill payments, and personal spending out of your business account leads to a mis-alignment / confusion / lack of discipline in your mindset, your business vs personal activities and your financial records.

By keeping them separate:

  • your bankers, investors, accountants will see you are managing your finances professionally
  • you’ll save time, effort and cost in reconciling your accounts at the end of the year (through reduced book-keeping and accountant costs)
  • you’ll develop a more disciplined mindset, with greater focus on segregation of your business and personal life
  • you’ll maintain a more accurate picture of what real business funds are available
  • you’re setting up a more valuable conversation with your Accountant at the end of the year – now he doesn’t have to spend your dollars on unravelling the personal from business expenses.

Simple Steps 2:

  1. Keep your business account(s) and your personal account separate
  2. Budget for a regular (monthly) transfer of funds out of your business to your personal account (This could be Director’s drawings, salary, dividend – dependent on the tax advice of your accountant)
  3. Stick to only using your personal account for personal expenses and day-to-day incidentals and don’t dip into your business funds. (the Hawthorne Effect might lead you to reduce your overall spending, simply because you’re pay more attention to it – an added benefit)

[NOTE: When I moved out of this ‘mixed-wallet’ situation myself, I found it helpful to think…”If this expense isn’t tax deductible…. then should it come out of my personal account ?” It helped get my thinking clearer.]


It’s called Working Capital for a reason.

Working Capital consists of Debtors plus Inventory plus Cash in the Bank, minus Creditors and ‘Other Liabilities’.

OK: We talked about your Cash in the Bank and ‘Other Liabilities’ in 1. and 2. above.

Now you’ve got control of those 2 items you can focus on the other 3 aspects of Working Capital, the ones that directly relate to your day-to-day running of the business.

  • Debtors: How much your customers owe you
  • Creditors: How much you owe to suppliers and
  • Inventory: How much stock you are holding to make your products and to satisfy your customer orders.

If you think about your cash situation as a constant flow, you can see that the more your customers owe you and the more stock you are holding means the more cash you have tied up that you can’t immediately put your hands on.

Having a bigger Creditor balance is a good short term offset against these 2 items – as long as you are confident of converting your stock into sales, against which you can collect cash to pay the Creditor for that stock. But you shouldn’t abuse it; try to negotiate the BEST POSSIBLE terms you can with your suppliers.

The IDEAL position to aim for is:

  • Cash sales to customers (no Debtors to worry about)
  • Less than 30 days stock holding and reliable stock replenishment lead-times
  • Longer than 30-day payment terms with your suppliers (so you can convert your stock to sales to cash before you need to pay your suppliers)

That is IDEAL, but smaller businesses are often challenged to achieve anything close to this.

All businesses differ. Different business models have different working capital cycles and different working capital requirements.

The fundamentals remain true though.

The longer the cycle between paying for the stock (or paying salaries in a service industry) and receiving cash back from customers for their sales; the greater the strain on your cash position, and the reduced ability to invest in business-growing projects.

[The Management of Working Capital is a separate workstream of the Conversations with my Accountant mini course]

Simple Steps 3:

  1. Try to get as close to ‘Cash’ sales as you can
  2. Keep the bare, safe, minimum of stock to keep your customer orders flowing (Beware of volume discounts from suppliers; the payoff in reduced costs might lead to higher stock-holding costs that put too much pressure on your cash flow)
  3. Try to get the BEST possible terms from your suppliers (again, be careful of offers of volume discounts)



The biggest stresses in life and in business come from the ‘UNKNOWN’:

  • Where will the next sales come from ?
  • When will the customers pay ?
  • What bills are due ?
  • Have I got enough cash ?

In your business you are striving to get predictability and consistency in the answers to these questions.

The good news is – there are straightforward ways of achieving this; and the Budgeting Process is a key tool for you to use.

Budgeting is a way of formalising your plans along with acknowledging your current situation. It offers a way of getting clarity for your business position and providing a basis for you to hold yourself, and your team, accountable for delivering the results you want, need and expect.

Simple Steps 4:

  1. Map out what you already know – what are your regular outgoings (rent, wages, telephone, computer, etc etc). Map them out on to a spreadsheet and split them into months. These are your overheads.
  2. Estimate what overall profit you want to make in the year – split that into months on the spreadsheet too.
  3. Calculate your gross profits (sales revenue minus cost of sales) per unit of sales
  4. Estimate how many units you need to sell at that gross profit value to a) cover your regular outgoings (overheads) AND b) deliver your monthly profit target.
  5. Add 10% to those units to cover contingencies for unforeseen expenses and give you some fat to grow the business.

You now have a very rudimentary budget for the business and forward-looking plan.

Are you feeling a little less anxious already ?

The units you have calculated (including the additional 10%) are now your sales target.

You are now clear on what you, and your team, need to do (go out and sell those units) to achieve your profit objectives.

And if you’ve followed the points 1 – 3 above, you’ve got your cash and cash-cycle under control and you can have greater confidence in having cash in the bank to grow your business.


When I was majoring in Economics, so long ago, we used the term ‘over-trading‘.

In simple terms it means “the faster you grow the more stress you will put on your cash resources and the greater the risk of failing as a business”. It is not a matter of profitability, but of growth. Many highly ‘successful’ businesses and profitable ones have failed, because they grew too fast and ran out of cash. [EXAMPLES]

Interestingly, and this is a subject for another discussion, there are several businesses that have secured significant (million dollar) investment from venture capitalists to fund their growth, and still failed because they didn’t look after their cash as they grew.

The situation goes back to managing your Working Capital. Not so much from the mechanistic aspect as we discussed above, but more from the structural aspect.

The faster you grow the greater the cost base you’ll need; more warehouses or manufacturing facilities, more staff, more desks, more phones, as well as more inventory, debtors, and creditor bills.

More of these costs will be fixed (your overheads) or ‘stepped’ costs – where they don’t change in proportion to the value or number of units of sale that you make.

For instance – once you get to a certain size – let’s say 10 employees – you will find it more and more difficult to manage them all personally. So you employ a Supervisor or Manager to help you. A significant investment, with many on-costs to consider and difficult to ‘turn-off’ if your growth does not last.

Similarly, investments in more facilities to service growth; machinery, warehouses, office space, vehicles, employees (particularly for service businesses) is another set of not-easy-to-reverse spending decisions.

So what do you do if you are successful and want to grow ?

Simple Steps 5:

  1. Build flexibility into your growth; Rent or lease facilities rather than buy them.
  2. Look to build capacity (manufacturing or services) by initially engaging contract and casual staff until you are confident that your growth is consolidated and sustainable.
  3. Ensure that your processes and systems are designed and implemented to be as efficient as possible, to support your growth without incurring more and more administrative burden.
  4. Work your WORKING CAPITAL hard, as above

In Conclusion:

You can still expect your Working Capital cycle to lengthen, it is natural and expected. You’ll have more customers owing you more. You’ll have more inventory to hold, to satisfy your growing sales, and you’ll have more creditor bills to pay.

The trick is BALANCE and sustainability.

You’re in business for the long haul. Slower, but more controllable and sustainable growth will bring you greater rewards in the end and do it without venturing too far into the ‘UNKNOWN’ and losing your Peace of Mind.

More power to you, and your business growth!

Dean Craven qualified as a Fellow Chartered Management Accountant in the 1990s! He has spent his career using the skills and experience to help large businesses around the World get organised and grow.

Now he is focused on helping startups and early-stage businesses to grow-in-control; to scale to be sustainable businesses to provide personal and economic growth for their founders.

He doesn’t advise on tax. He doesn’t want to be your accountant. He wants you to have the knowledge and confidence to have better “Conversations with your accountant“, to keep a handle on your cash and know where your profit comes from.

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