Planning cash flow for success

By Peter cox May 11, 2018 Money Matters

How many times over the last 25 years have I heard the following from owners and managers of hardware stores?

“The accountant just told me how much tax is owed for the last financial year – if we are so profitable, why are we broke?”

This sentiment may be familiar to many hardware retailers, but it doesn’t have to be.

Once you recognise the difference between profitability and liquidity – or another way is Net Profit and Net Cash Balance for a trading period – taxes don’t have to be so painful.

The problem comes when there is no cash flow plan or regular review of the current cash position and future cash flow inputs against cash flow out.

My experience has been that, with greater competition comes a tightening of Gross Profit Margins (even with low interest rates on borrowings), which means the number of hardware stores and merchants that are under stress due to poor cash flow is growing.

These businesses usually have one thing in common: none of them had ever worked to a cash flow budget or (worse), if they have put one together, they do not use it.

Why? Because the bank told them to put one together for the yearly review, the exercise is handed to an external accountant who is more than happy to put a cash flow budget together aong with an invoice!

It goes further than this when a hardware store decides to expand but is undercapitalised and does not undertake a feasibility study as well as a projected sales budget leading to a profit budget and a cash flow plan.



My experience over the last 25 years in the industry is that once accurate profit and cash flow budgets have been established for owners and managers in dire straits, their stress levels have gone down.

These budgets give a clear picture of how the store is doing (no matter how bad), and allow rational evaluation and positive decision making.

With clear financial directions, store owners and management can take action to boost their business.

This approach is much better than descending at an ever increasing rate into a gibbering, steaming mass of management inertia and playing hide and seek with creditors.

In any business, your best asset (after yourself) is cash.

But you have to have enough of it to pay everyone else first before you take your share.

The aim of cash management is not to accumulate as much cash as possible but to maximise your cash flow and the return on your capital.

Cash has very little value on the balance sheet, except to please the banker.

Your cash balance at any point of time should be enough to pay bills and payroll comfortably for at least four weeks.

You should also be building cash reserves to cover other nasties like VAT, other taxes and long service leave.

Knowing what your desired cash levels or minimum positive working capital should be is another essential part of successful cash flow management.

Too many owners build up loans to themselves or personal assets rather than strengthening their business to cover the full cash commitment of the loans and other outflows incurred with growth.

Does the following phrase sound familiar? “We’ve got cash – let’s go and buy a boat!”

However many store owners are now being asked to come up with loan reduction plans as the banks review and tighten their lending book instead of merely accepting interest payments on loans.

A cash flow projection can give far greater confidence, not only for you, but also for lenders.

That is why during the last 10 years if you have a cash exposure to the bank they will require the cash flow plan.

Nothing inspires less confidence in a lender than last minute appeals for cash.



A good cash flow plan will help highlight peaks and troughs of cash needs so timely overdraft increases can be planned and made or surpluses put away until you know they are needed.

In summary there are 3 golden rules in cash flow planning

  • The Past – Where has all the cash gone and how is the business placed for the future?
  • The Present – What is the cash position now to budget? Are there any early warning signs of future trouble?
  • The Future – Where will all the cash go and how much extra will I need or have available?

Many are the theories and books written about why businesses fail.

However, in my experience, the key reason is generally pretty simple, they run out of cash!


Peter Cox has spent over a decade training and consulting in the retail hardware industry. He has conducted key-note addresses, and management and sales workshops, which are aimed at improving profitability and liquidity in one of Australasia’s most competitive retail environments. Visit


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