Understanding your business cash flow
A short guide to business cashflow management
For small businesses and their owners, the longevity of your business relies heavily on how your money moves. Getting an in-depth understanding of how cash is flowing in and out of your business empowers you with the right information needed to grow strategically. This is important because once your cash flow ceases, it becomes harder to kickstart it again and it inevitably affects other areas of your business.
Cash flow refers to the money that is flowing in and out of your business in a given period, normally a month. Cash flow entails two things: cash coming in and going out. In other words, your account receivables and payables. Cash can come in from customers or clients that patronize your services or buy your products. This is pretty much the business’ income or receivables. Cash can also go out in terms of rent. Mortgage, monthly loan payments, taxes, etc. This is pretty much the business’ expenses or payables. A cash flow statement shows the financial health of a business by showing just how much liquid cash the business has on hand. This guide will detail the ins and outs of cash flow so that you can then develop an informed financial plan that seeks to ensure that cash continues to go in and out of the business.
Understanding cash flow is very important as it helps you determine if your business is profitable or not. To do this, you add up all your assets and accounts receivables and subtract that from your total accounts payable. A positive result shows that your business is profitable while a negative one suggests that you look for ways to increase profitability.
Note: A positive cash flow, however, doesn’t necessarily mean profit.
The difference between profit and cash flow
Cash Flow mainly represents the balance in your bank account and as such, it is possible for your cash flow to be on zero and still have turned a profit. For example, a business that makes a 15% profit on the sale of each item, but because the expenses are high, the cash flow will be low or negative. Also, things like pending accounts receivables make a cash flow statement an unideal way of tracking your profit.
Tips for Managing Your Cash Flow
In order to avoid cash flow emergencies, make sure to follow these tips to better manage cash flow. The first thing to do is to ensure that your inventory is controlled. If you’re a physical product-based business, having too much inventory means you have less cash on hand. So make sure you have an average amount. Next, set up a collection s schedule to collect due receivables. Also, run a regular cash flow report. This could be monthly to show how much you received and paid out. With this cash flow statement, you can identify unprofitable business relations and make decisions to end them.
Then, adjust your payment terms so that they are decided at the beginning of the agreement. If you ignore the importance of getting paid on time, you run the risk of seeing your cash flow reduce to zero. So, agreeing on payment terms early on both in a contract and verbally helps to sidestep such issues. You can include incentives like payment discounts or future discounts if they pay early to lock them in. Also penalizing them for late payments can ensure that this part of your cash flow is handled well. Whatever approach is taken, make sure that the terms are well spelled out in the agreements.
Also, make sure that your payments or customer acquisition processes are easy and fast. Nothing irks customers-to-be than a long payment, sign-up, or onboarding process especially if you’re a business-to-business company, as business owners do not have time to waste. Hence, it makes more sense to have processes that are convenient. In managing your cash flow, you need to have a well-rounded marketing strategy. First of all, do not restrict yourself to only one marketing channel. Make sure to meet your prospective customers at all the available touchpoints. Focus on the marketing tactics that make sense for your niche and your business. A multi-channel marketing approach will not only increase your business’ exposure and attract more sales, but it can help boost your cash flow and bring in revenue at a steadier pace.
Using a Cash Flow Statement
If you want to keep track of your business’ cash flow, the best way to do that is to run a cash flow report. The main categories found in a cash flow statement are Operating activities, Investing activities, and Financing activities of a company and are organized respectively.
Cash flow from operating activities is the section of a company’s cash flow statement that represents the amount of cash a company generates or consumes from carrying out its operating activities over a period of time. Operating activities include generating revenue, paying expenses, and funding working capital (capital required for day-to-day activities). It is calculated by taking a company’s (1) net income, (2) adjusting for or adding non-cash expenses like depreciation, stock-based compensation, and others, and (3) accounting for changes in working capital based on whether there are unpaid revenues or accrued expenses. When you’re done with this section, you see a summary of how much cash is generated from the company’s core business.
Cash Flow from Investing Activities is the section of a company’s cash flow statement that displays how much money has been used in or generated from making investments during a specific time period. Investing activities include purchases or sales of long-term assets such as property, plant, and equipment, acquisitions of other businesses, and investments in marketable securities (stocks and bonds). Depending on if this is an inflow or outflow, it will be added or subtracted respectively. Finally, cash Flow from Financing Activities is the net amount of funding a company generates in a given time period. Finance activities include the issuance and repayment of equity, payment of dividends, issuance and repayment of debt, and capital lease obligations. Companies that require capital will raise money by issuing debt or equity, and this will be reflected in the cash flow statement.
To get your cash flow to stay in the positive, look at your total sales at the end of the month, add up all purchases made but not paid for yet then subtract the difference. The difference tells you how much income needs to be brought in by the next month to stay even