Cash flow is the HEART of any business. Small businesses, in order to be successful, are largely dependent on their cash flow, making it critical for any business owner to understand the impact, positive or negative, that cash flow has on their business. It’s crucial that you understand cash flow management if you are hoping to succeed with your business.
In this article, we will take a look at why cash flow management is so very important for new and existing businesses. Plus, we will examine the things you need to know about small business cash flow management so that you will see success with your new or existing business rather than failure.
Why Is Cash Flow Management Important for Business?
According to a study performed by US Bank, 82% of businesses fail due to poor cash flow management or a poor understanding of how cash flow affects their business. Without an adequate amount of cash flow, a business cannot purchase inventory, hire and pay for employees, finance their operations, or secure a line of credit or credit cards.
New small business owners and entrepreneurs often struggle with managing cash flow in their first few years of business. However, cash flow management of a small business is a crucial concept to grasp; it can make or break you if you don’t get a solid understanding of what’s at stake – your money.
Often, new businesses cannot predict the inflow of cash and don’t anticipate the cash needs they have in their first years of business. As they grow, without a degree in finance, they do not know how much cash will be coming in or how much is coming out. To further understand the importance of cash flow, we’ll look exactly at what you need to know, whether you have a new or existing business.
If you are starting a new business, understand the stages that your business will go through so that you can have a solid grip on your cash flow. What’s most important, and what considerations do you need to make to keep a firm hold on your cash? Make sure you control your cash flow during all stages of business, especially during infancy, so that you can pay your bills.
1. Understand What Cash Flow Is.
What is cash flow? Cash flow is, in simple terms, your total sales revenue minus your total expenses. It’s important to be able to project your cash flow as much as possible, but this is not an easy task because your revenue and expenses are typically changing all the time.
When you budget or make projections, try to get as close to the actual numbers as possible. The last thing you want is to owe more money than you have.
- Cash flow tracks the amount of cash coming in and out of a business.
- Cash flow is recorded only when money comes into your business.
- Your cash flow balance is the amount of cash coming in less the amount of cash going out.
- It’s important that you understand that cash flow can be both positive and negative.
2. Know the Difference Between Cash Flow, Revenue, and Profit.
You may not have a financial background, and these terms may sound like a foreign language to you. Alternatively, you may have misunderstood what the difference is between these terms or what is meant by each individual term. Once you have a firm grasp on these terms, the accounting and business aspects of your company will be easier to manage.
Let’s review the basic terminology of cash flow, revenue, profit, and related terms. It’s important that you care about these things because if any of them are considerably off, your business may be headed for trouble. You want to make certain you account for all of these items when preparing your financial statements and/or budgeting/projecting your finances.
- Operating Cash Flow = The money going in and out of your business.
- Revenue = The income your company earns from the sale of goods and/or services, plus any interest, fees, and royalties you receive.
- Profit = The revenue you earn less your expenses.
- Gross Profit = The revenue you receive from your goods and/or services less the cost of producing those goods and/or services. Gross profit accounts for any expenses directly related to the creation of the specific goods and/or services you are selling.
- Net Profit = Net Profit includes all other business expenses, not just the direct costs you have. Additional expenses included are things such as payroll, utilities, and taxes.
3. Manage Your Cash Flow.
The best way to get ahead of a cash flow problem is to exercise good cash flow management. This means improving your cash flow by having an accurate cash flow statement, which may be difficult if you are a new business just starting out and don’t know how much incoming cash to expect.
- Determine what your break-even point is, the point where revenue meets expenses. Before spending too much money on supplies for your inventory, you’ll want to know what your sales revenue is going to be. Having a good cash flow statement can help with this.
- Utilize cash flow forecasting to head off cash flow problems. Predicting your cash flow may be difficult, but with the help of a business advisor or financial manager, you can get a grasp on what your cash flow expectations are.
- Plan ahead for expenses and save regularly to avoid having a negative cash flow. In your cash flow statement, you will want to look at how well your income exceeds your expenses to avoid owing more than you have.
- Perform a cash flow analysis regularly. Aim for long-term, steady results.
- Create backup plans to smooth cash flow, like an emergency fund or a line of credit. You may want to ask your customers/clients about early payments. If they pay early, you will see a positive cash flow sooner.
4. Solve Cash Flow Problems.
If your business spends more than it earns, or your accounts receivables come in slower than the time your payables are due, you may have a serious cash-flow problem. Here are some ways to solve cash flow problems:
- Ask clients and customers for a deposit or milestone payment. You may even want to offer a discount for clients and customers who pay early. This way, you will see cash faster.
- Ask clients and customers to pay faster. You may want to collect accounts receivable sooner rather than later to have cash sooner.
- Cut or delay any expenses that you can. You may have supplies, inventory items, or equipment you are not using. Consider selling those items at a discount to get cash sooner rather than later.
- Establish favorable credit terms with trade partners and/or suppliers.
- Consider leasing or selling any equipment that you currently own. This would be especially helpful if you are not currently using said equipment in the course of your everyday business operations.
Make sure you implement the tips that will help you the most from this article. Many of these suggestions are meant to help new business owners or entrepreneurs as they muddle through the course of their new business operations, but these ideas can be very helpful for anyone. Take what is most helpful to you, and use it to the best of your ability, or ask us for help!
A cash crisis can be emotionally devastating and could even put your business OUT OF BUSINESS. It’s clear this would be the last thing you want with your new business, but unfortunately, it happens all the time. Starting a new business in today’s economy is a difficult thing to do, but with the right mindset and cash flow management, you can succeed.
At Borshoff Consulting, our cash management service allows you to know when, where, and how your cash needs will occur to ensure success for your business. This will help you in preparing your cash flow management statement and other financial documents, which are all important parts of running your own business.
Borshoff Consulting wants to help you succeed with your small business. We do business consulting, tax resolution, and much more, so get in touch with us today to find solutions to your cash flow problems or for solutions to any tax issues you are facing. You can trust Indiana’s tax expert to lead you in the right direction with your business or tax needs.
Are you concerned about being audited in the future? While the chances of an audit are slim, we can help with this.
We know the ins and outs of a tax audit. In fact, we have a complete guide to surviving a tax audit that will help prepare you for a tax audit if you foresee one in the future. We want to help you with your tax and business needs with our services.
If we don’t have the answer, we will help you find someone who can help you out. Our mission is to help you reach your business goals. Reach out to us today to find out more about how we can help you. We offer free consultations, so what do you have to lose?