Managing cash flow in a small business: a 15-minute weekly routine with Xero

Short answer: managing cash flow means knowing, before it happens, which week the bank balance will be at its lowest, and acting early enough to change it. In a small business that comes down to one habit: once a week, look four weeks ahead. Take today’s bank balance, add what customers are due to pay each week, take off wages, bills, rent, tax and loan repayments as they fall due, and see where the balance ends each week. If any week drops below the minimum you want to keep (your cash floor), you still have time to chase an overdue invoice, move a payment to its real due date or hold back drawings. In Xero this takes about 15 minutes with three reports, and the worked example below shows a business that found a 600 low point three weeks before it would have happened.

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What cash flow management is (and is not)

Cash flow is the money moving in and out of the bank (what is cash flow?). Managing it is about timing: making sure there is enough in the account on the day each payment is due. It is a different job from:

• Improving cash flow, which is about freeing cash for good: getting paid sooner, holding less stock, better prices. How to improve cash flow ranks those fixes by how much cash each frees.
• Making a profit. A profitable business can still run out of cash in a particular week, because wages and tax are paid before customers pay. Profit but no cash? explains the gap.

Good management will not rescue a business that loses money, but it stops a profitable one from being caught out.

The weekly routine: five steps, about 15 minutes

Do it on the same day each week (Monday morning works, before the week’s payments go out), after the bank feed has come in.

1. Reconcile the bank in Xero. Every other figure depends on it. If the balance in Xero does not match the bank, fix that first: why the Xero bank balance does not match.
2. Note today’s bank balance, across all business accounts, less anything set aside for tax (see below).
3. Money in by week. Run Aged Receivables (or Aged Receivables Detail) aged by due date. Put each invoice in the week it is due, but move customers who always pay late to when they really pay. Leave out anything more than 30 days overdue: that is money to chase, not money to count on. Who owes me money? shows how to read the report.
4. Money out by week. Run Aged Payables for supplier bills by due date, then add the payments that are not bills in Xero: wages and payroll taxes, rent, loan repayments, GST, VAT or BAS payments, income tax instalments, super or pension, and what you plan to take out yourself.
5. Find the lowest week and act. Opening balance + money in − money out = closing balance, week by week. If any week falls below your cash floor, decide this week what you will do about it.

Xero’s short-term cash flow view (on the dashboard or Business snapshot, depending on your region and plan) does the next 7 or 30 days from invoices and bills already entered, which is a good quick check. It does not include payments that are not in Xero yet, such as next month’s wages or a quarterly tax payment, which is why the four-week view adds them by hand: Xero short-term cash flow.

Set a cash floor

A cash floor is the lowest balance you are willing to see in the account, set in advance so you are not deciding it in a panic. A simple version for a small business is one full payroll plus the rent, because those are the payments that cannot wait. Some owners prefer a number of weeks or months of running costs; how many months of cash should a business have? works through how to pick one.

The floor is a trigger, not a target. Dipping below it in a forecast means “act this week”, not “something has gone wrong”.

A worked example: four weeks ahead, heading for 600

A landscaping business in Brisbane runs the routine on a Monday morning. The bank is reconciled and shows 28,400. Wages and PAYG are about 14,200 a fortnight and rent is 3,800 a month, so the owner’s cash floor is 15,000.

From Aged Receivables (by due date), Aged Payables and the regular payments, the next four weeks look like this:

	Week 1	Week 2	Week 3	Week 4
Opening balance	28,400	20,800	16,400	13,200
Customers due to pay	12,000	9,500	15,800	8,200
Suppliers	−5,400	−7,100	−4,800	−6,300
Wages and PAYG	−14,200		−14,200
Rent		−3,800
BAS (quarterly GST and PAYG)				−9,600
Loan repayment				−1,900
Owner’s drawings		−3,000		−3,000
Closing balance	20,800	16,400	13,200	600

Over the four weeks 45,500 comes in and 73,300 goes out. The business is profitable, but the BAS, a payroll and a drawing all land in weeks 3 and 4, and the balance falls below the floor in week 3 and to 600 in week 4. Nothing in a monthly profit and loss would have shown this. (The Xero BAS report guide shows how to see the BAS total coming before the quarter ends.)

Three things the owner finds in the same 15 minutes:

1. 11,400 is more than 30 days overdue on Aged Receivables (two customers, 7,200 and 4,200), and none of it is in the forecast. A phone call gets a promise of the 7,200 in week 2. The 4,200 stays out of the forecast until it is paid.
2. The 4,800 supplier bill in week 3 is on 30-day terms and not due until week 5; it had been queued to pay as soon as it arrived. Paying it on the due date moves it out of the four weeks.
3. The week 4 drawing of 3,000 moves to week 6, after the BAS has gone.

	Week 1	Week 2	Week 3	Week 4
Closing balance before	20,800	16,400	13,200	600
Closing balance after	20,800	23,600	25,200	15,600

The low point is now 15,600, above the floor, with 15,000 of difference made by one phone call and two dates. Nothing was borrowed and no supplier was paid late. Next Monday the owner rolls the view forward a week, checks whether the 7,200 arrived, and adds week 5, where the 4,800 bill now sits.

If the actions had not been enough, the next steps would be agreeing a later date with the tax office or a supplier before the due date (not after), or arranging an overdraft early, while the numbers still look fine. Cash flow problems covers what to do when it is more than a timing issue.

The monthly and quarterly checks

The weekly routine catches timing. Once a month, with the month closed in Xero, look at the trend:

• Did cash go up or down over the month, and why? The Bank Summary gives the movement; the Statement of Cash Flows splits it into trading, assets and loans or drawings.
• Are customers paying more slowly? Debtor days rising month after month means more cash tied up each month. The debtor days calculator does the sum from your Xero figures.
• Profit vs drawings. Over a year, the owner cannot take out more than the business makes after tax and loan repayments without the bank balance falling. How much can I pay myself? works it out from Xero.

Once a quarter, look further ahead: a 13-week cash flow forecast catches the quarterly tax, super or pension payments and seasonal dips that four weeks can miss, and the cash flow forecast template does the same by month for a year (or build your own: cash flow spreadsheet).

Keep the tax money separate

GST, VAT, PAYG or PAYE and income tax collected during the quarter are not the business’s money to spend, but they sit in the same bank account until the payment is due, which makes the balance look healthier than it is. Many owners move a set share of each week’s receipts to a separate savings account. In Australia, GST is one eleventh of a GST-inclusive receipt: of the landscaper’s 45,500 coming in over the four weeks, about 4,136 is GST. In the UK at the standard rate, VAT is one sixth of a VAT-inclusive receipt, and in New Zealand three twenty-thirds. Count only the balance left after the tax account in step 2 of the routine.

Common mistakes

• Counting overdue invoices as money in. The forecast then looks fine until the week it is not. Count them when they are promised, chase them every week.
• Paying bills when they arrive instead of on their due date. Paying early is a choice; make it when cash is comfortable, not by habit.
• Looking at the month, not the week. A month that ends with more cash can still have a week in the middle where wages and a tax payment land together.
• Forgetting payments that are not in Xero yet: wages, quarterly tax, annual insurance, the owner’s own drawings.
• Only looking when the balance is low. By then the options are fewer and more expensive. The routine is most useful when everything looks fine.

Common questions

What does managing cash flow mean? Making sure there is enough money in the bank on the day each payment is due. In practice it means looking a few weeks ahead each week, finding the week where the balance is lowest, and acting early: chasing payments, paying bills on their due date rather than early, and timing drawings and large purchases.

How often should a small business check its cash flow? Weekly for the next four weeks, monthly for the trend, and quarterly for a longer forecast. Weekly matters because cash problems happen on particular days, such as when a payroll and a tax payment fall in the same week, which a monthly view can hide.

What are the main ways to manage cash flow? Keep a short rolling forecast, set a minimum balance (a cash floor), invoice promptly and chase overdue invoices every week, pay suppliers on their due date, keep tax money in a separate account, and arrange any overdraft or credit before you need it.

How much cash should a small business keep in the bank? Enough to cover the payments that cannot wait, such as one full payroll plus rent, as a minimum. Many owners aim for one to three months of running costs once the business can afford to; the right number depends on how seasonal the business is (seasonal business cash flow works it out) and how quickly customers pay.

Can Xero manage my cash flow for me? Xero shows what is owed to you (Aged Receivables), what you owe (Aged Payables), the bank balance, and a short-term cash flow view of the next 7 or 30 days from invoices and bills already entered. It does not know about payments that are not in Xero yet, such as future wages or tax, so you add those yourself, and deciding what to do about a low week is still your job.

What is the difference between cash flow management and cash flow forecasting? A forecast is the table of expected money in and out and the balance it leads to. Managing cash flow is the routine around it: updating the forecast every week, comparing it with what happened, and acting on the low weeks it shows.

Your cash position every Monday

ReportPilot reads your Xero figures and sends a short plain-English email every Monday: cash in the bank and how it has moved since last month end, who owes you and how much is overdue, bills due soon, and how sales and net profit compare with last month. That gives you the starting figures for the routine before you open Xero. Its dashboard shows 24 months of sales, profit, cash and money owed to you by month. It asks Xero for read-only access, so it can read your accounts but never change them, and there is a 14-day free trial with no card.