Here's a good article from Dun & Bradstreets
Five cash flow questions to ask yourself
With one-in-three businesses indicating cash flow will be an issue for operations in September quarter of 2014, it's time to ask some questions about how you're managing the money going in, and out of your business.
1. Do I know the difference between profit and cash flow?
One of the most important things to be aware of is that profit and cash flow are two very different things. Profit refers to the money made after all expenses are deducted from revenue, and according to Westpac, profit pays back long-term debt and supports growth.
On the other hand, cash flow is the amount of money actually transferred into and out of a business; and pays for day-to-day expenses. In cash flow terms, money going out of the business also includes any purchase of assets such as machinery or acquiring a business, which profit doesn't take into account. This means that even if you're making profits, you may not have the required cash to pay suppliers, which can be due to cash being tied up in inventory, accounts payable and so on. Vice versa, you may have significant liquidity, yet not make much profit.
2. How much does my business expect to earn in the future?
While it's crucial to calculate your current cash position (incomings minus outgoings), businesses should also make a cash flow forecast, to determine when the periods of weak and strong cash flow are and be alerted to periods where outgoings exceed incomings. This can be determined by anticipating how much you expect to earn in the future, compared to expected expenses over the same period.
3. What proportion of my earnings is liquid?
Good cash flow means you have sufficient cash reserves to pay your suppliers and other bills - not just the revenue from sales recorded on the books. If you have provided goods and services to a customer on credit, you may not receive payment until the end of the standard 30 day payment period - that's one month without cash reserves that could be used to pay off business expenses. As a result, this may put pressure on your cash flow cycle. By determining how much money is tied up in accounts receivable each week or month, you'll be able to work out the remaining available cash you can use to pay off expenses.
4. How much do my outgoings amount to?
Accurately calculating your cash flow stems from an accurate depiction of your outgoings - this includes supplier payments, rent, salaries, loan repayments, credit card payments and any tax obligations. You should also take into account irregular or seasonal expenses, such as maintenance and stock purchases.
5. Are there any areas of the business not making money?
There's no point keeping an area of the business operational if it's not bringing in sales in the long-term, as this is an expense that can drag down cash flow. So what are the warning signs? If you have excess inventory of a particular product, or have a product that just doesn't fit into your business vision, it may be time to cut it loose. Or perhaps you have two very similar business functions within your organisation - you may want to merge them or eliminate one. By cutting unnecessary costs you'll be able to save money and boost your cash flow.