Cash is King – The Importance of Cash Flow for Small Businesses

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.

What Do I Need To Know About My Financials? A Question for Small Businesses

What Do I Need To Know About My Financials? A Question for Small Businesses

Let’s face it, being a small business owner is no easy task. There is no shortage of things to manage, however understanding your financials, or at least having a team to help manage them and keep you informed is key to your success. In this post, we highlight why it’s important to stay on top of your financials, and areas to prioritize your involvement. 

Staying on top of your financials

Your business financials are a strong indicator of your business’ health and what you can expect in the future. Moving forward, you’ll be able to make the best decisions for you and your business and build a solid strategy to achieve your goals. Whether it’s making additional investments, identifying requirements to apply for business loans, or deciding to release a new product, you’ll be able to proceed with confidence knowing you have the financial resources to do so. 

Example strategies and outcomes

Here are further examples of how understanding your financials can help you make the best decisions for your business and business goals.

Investing in new assets 

Say you decide to invest in new assets – for example, new computers for your employees. Having a strong understanding of your current financials, allows you to easily determine how you will pay for this investment and when the investment will pay itself off. 


Securing a loan 

One day you hope to secure a loan, in order to complete a specific project that will have a strong return on investment. Being able to identify how much is required, how much you can afford to borrow and when you will be able to pay it back are all extremely important factors to map out. If you do not have a strong understanding of your current financials, you may fail to secure the loan, or worse, fail to earn a return on your initial investment. 


Filing taxes

It’s that time of year, tax season. Being in the loop with your finances takes the headache out of filing taxes. You can easily determine your revenue and identify your expenses in order to stay compliant with tax liability. Not only that, you will get the most out of your deductible expenses, by knowing what ones to write off.

Key areas to focus on

While the more you know and understand about your financials, it can be overwhelming to stay on top of it all. After all, you didn’t start a business to crunch numbers in the evening. 

Here are some key areas to focus on to give you a solid understanding of your business’ financial health. 

Balance sheet: according to Investopedia, a balance sheet is a financial statement that reports on a company’s assets, liabilities and equity at a specific point in time. 

Income statement: BDC describes an income statement as a fundamental document to make up a company’s financial reporting, showing the profitability of a business over a specific period of time. It summarizes revenues and expenses, and also shows the company’s net profit or loss. 

Cash flow statement: a cash flow statement, otherwise known as a flow statement, determines and summarizes the amount of cash or other cash equivalents that enters or leaves a business.

Signs it’s time to hire a bookkeeper

Again, while it’s wise to keep an eye on your finances, that doesn’t necessarily mean you have to be the sole person managing them. If you’re struggling to manage the growing list of to-do’s, hiring a bookkeeper can ensure that you stay on track and meet your business goals, allowing you to focus on the other important aspects of your business. 

Check out our post, where we highlight what hiring a bookkeeper can do for you.