How much cash to do I really have?

Most SME business owners are all too aware of their bank balance – cash is everything!

The issue is that your bank balance is not a reflection of your profit, and hence the money you get to keep. If you’re in business, a good understanding of how much cash you really have is a good place to start to make you more aware of how this funky "accounting" business works and how to get the most out of all the work you do to keep you records up to date.

At the bottom there’s a formula you can use to figure this out for your business.

Timing of when customers pay you.

Customers or clients will pay you for your product or your service. Often this will be at a different time to when you either did the work or sold them the product.

If you’re a café owner or have a retail store, you don’t have this problem – your sales and the amount you bank should be the same. If they’re not, there’s a different problem.

For everyone else, there’s a timing issue. If you’re a services provider, you’ll normally do the work and then bill either during or at the end of a project, which your customer will then pay once they get it through their accounts payable systems.

Given it’s revenue, it’s part of your profit number. You don’t have the cash yet so it means you’re profit is higher than your bank balance.

In other cases, if you sell products online, you may collect cash before you ship the product. In that case you collect the money in advance, which means your bank balance, at that time, is higher than your profit.

If you do have this timing difference, always setup your invoices to customers as soon as the work is done, or at the end of the month. That way you always know how much they owe you.

Timing of when you pay your suppliers

Where you’re the customer, you have exactly the same timing difference – a contractor may have done some work for you, you pay them after the work is done. Their cost reduces your profit number however you haven’t paid them yet. In this case your bank balance is higher than your profit number.

Sometimes you need to pay in advance, such as the rent on a property you lease for your business, in this case your bank balance is lower than your profit number.

A lot of people don’t enter their bills until they’ve paid them. If you pay everything by credit card that’s fine however if you pay on account for anything, you want to enter them as soon as you get them so you know how much you need to reduce you bank balance by,  

Timing of payments for GST / Sales Tax

The timing of this is determined by the country you’re in and the size of your company, in this case we’ll talk about an Australian business with less than $2m in revenue.

In this case, the GST you collect from customers, less the GST you pay to suppliers, is paid at the end of the quarter. For the March quarter, it’s due at the end of April (May if you have a tax agent lodge it for you). If you sell something to a customer for $55, $50 is revenue and $5 is GST.

It’s also payable on a “cash” basis rather than “accruals” basis. What does this mean? It’s GST collected less GST paid from January to March. For an invoice raised to a client at the end of March, if you’ve not received payment the GST on that invoice doesn’t count.

This is where using a cloud based accounting package is a good idea – they are setup to keep track of all this for you. That includes taking pictures of receipts etc, all of it’s picked up that way.

So for GST collected in January, you don’t pay it to the tax office until late April (or May).

What does that mean? Your bank balance will be higher than profit while you’re holding the cash. It’s also interest free…….if you keep track of things you can use it as very inexpensive cashflow funding.

Timing of payments for Employee Taxes & Benefits

This again is determined by the country you’re in and the size of your business.

When you pay employees each month, fortnight, or week, you hold back taxes. If you’re in Australia and your annual PAYG (pay as you go) taxes withheld from employees (including you if you’re an employee) is greater than $25,000, you pay this monthly, towards the end of the following month.

The gross pay to staff is considered an expense at the time it’s paid. However, once again your bank balance is higher than profit as the taxes are paid later.

The same is the case for Superannuation (pensions). In Australia this is due at the end of each quarter, however the expense is picked up at the time you run your payroll.

Cloud based accounting systems with integrated payroll are your best friend here to keep on top of all of these bills.

So how do I know how much cash I really have?

I use a liquidity calculator that helps you see where you’re at. For this to work, make sure you’ve done the following first:

1.       Reconcile your bank balance up to the end of last month

2.       All invoices to customers are entered

3.       All invoices owing to suppliers are entered

4.       All of your receipts are in

5.       Payroll’s up to date

Run a report called a “balance sheet”, pick the last day of the month for last month, it’ll give you the numbers you need:

Cash balance at the end of the month (this includes credit cards)

+ Accounts Receivable balance (amount customers owe you). On this one, only count those who will pay you in the near term. 

- Accounts Payable balance (amount you owe suppliers)

- GST owing (you may need to net off GST from sales & purchases, depending on your system)

- PAYG owing

- Superannuation owing

- Unpaid Expense claims

= Available cash

You may have other +’s & -‘s, such as loan payments, which need to be factored in. A good accountant will help you know which balances to add and subtract from your balance sheet so you know where you are.