Cash is King – The Importance of Cash Flow for Small Businesses
Today the plates of small business owners are full with juggling the ever-growing number of daily tasks and time they need to spend actively reviewing their business operations and financial statements. However, one area that small business owners should never overlook is cash flow.
In this post, you will learn what cash flow is, the importance of it, and sure-fire ways to help you stay on top of it.
What is cash flow?
To start from the beginning. Cash flow is the movement of money in and out of your business. Unlike revenue, which only accounts for the sale of products or services, cash flow provides an understanding of the net amount you have earned from your profits while taking into account the usage of cash and everyday expenses. To provide an example, you have completed work for a client and have sent them an invoice. While this is a profit, it is not cash, as payment has not been received and funds have not been deposited into the bank yet.
Your crystal ball
Now cash flow has been deemed with the saying “cash is king” since businesses can’t exist without cash. It has also been said to be one of the most important measures of a business’s health.
Similar to managing revenue or preparing a balance statement, managing cash flow gives you a good idea of how your business is performing, but better yet, provides an accurate summary of how much cash your business has on hand at any given moment. By understanding how much cash you have on hand, you can be more strategic in your business decisions.
For example, if your business experiences seasonality, monitoring cash flow can help you determine when to start saving funds in advance for the slower periods or help you discover new revenue opportunities to help compensate for the dip in everyday profits. Another example is you may need to invest in new equipment which you know will be a significant cost. Having a good understanding of where your cash flow stands, can help you determine if you should go ahead with the purchase or hold off until the next business quarter.
Another great reason, and perhaps the most important, is to manage your cash flow to foresee any potential problems before they arise. It’s common for small business owners to get bogged down in everyday tasks and sometimes fail to carve out time to send customer invoices or follow up on payment. Or they do not have the necessary team members in place and fail to realize that they are operating with debt. By quickly referencing your cash flow, you can make better and more proactive decisions for your business and not fall into these traps.
Ways to manage your cash flow
Now that we’ve covered the importance of managing your cash flow, here are some ways to do it!
Prepare a cash flow analysis
The first is preparing a cash flow analysis, which is to monitor all transactions that could impact the cash flow of your business. These include accounts receivable, accounts payable, credit and inventory purchases. A good recommendation is to perform a cash analysis every month, which can be done by combining all unpaid purchases against your total sales or profits at the end of the month. Here’s a calculation that might help:
Cash Flow = Operating Cashflow – Working Capital – Capital Expenditures – Dividends
If you see that you have more expenses compared to incoming cash by the end of the month, this could be an early indicator of a cash flow issue that needs attention.
Create a stellar cash flow budget
Now, if you have committed to doing a cash flow analysis each month, another way to gain better insight and manage your transactions is to prepare a cash flow budget. A cash budget will help you determine the patterns in which money goes in and out for your business. These patterns can typically include one-off expenses, monthly or quarterly recurring expenses and yearly expenses and revenue.
Want to create a cash flow budget for your small business? Check out this blog post by the Balance Small Business.
Don’t go the journey alone
Being a small business owner is hectic enough. If you’re looking for ways to streamline your work, definitely consider accounting software such as Sage, which can help you automatically generate invoices, pay your bill, and even create cash flow statements. If you’re looking for more hands-on support, don’t hesitate to team up with a bookkeeper and see what they can do for you.
October is Small Business Month!
To help celebrate small business month, here are upcoming sessions you don’t want to miss!
Small Business Week at SBBC
Small Business BC is hosting various sessions through October 17th-23rd to help small business owners improve and grow their businesses. With the support of their industry partners, they are hosting in-person and online sessions across the province. Take a look at their sessions here.
Sage Small Business Month Webinar Series
If you’re looking for more information on Sage accounting, make sure to check out their Small Business Month webinar series. These sessions feature industry leaders who focus on trending small business topics and share their advice and best practices to help solve key concerns and challenges for small business owners.
