cash flow statements

What You Need to Know About Cash Flow Management

Your small business could have all the clients it wants and be profitable. Yet without cash-on-hand, things could fall apart in an instant. Profits don’t guarantee you’ll always have cash to pay employees, purchase supplies and take care of your vendors. The good news is that you can control your finances to ensure cash is always available. It begins with understanding how cash goes in and out of your company.

Cash flow is the cash you have available after paying all expenses. A business with negative cash flow pays more than it brings in. Any cash left over at the end of the month comprises your profits.

You can create two types of reports to help you manage and predict your cash flow:

  • Cash flow statement: Looks at the current state of cash in your business on a monthly basis. Start with the cash you have at the beginning of the month, add income and deduct expenses. The result is the starting balance for the next month. This helps you monitor for negative or low cash.
  • Cash flow forecast: Based on historical accounting data, this report helps you predict your cash flow in the future.

Using the cash flow statement

A cash flow statement lists income and expenditures for a time frame in the past or future. You can use a cash flow template to identify or predict trends of when you’re low or high on cash and expenses.

A cash flow statement sorts the cash into three areas:

  • Operations: Cash for business operations including services provided and product sales as well as payments for payroll, vendor, rent, utilities and taxes. In accounting, these are accounts receivables, accounts payable, inventory and depreciation.
  • Investing: Cash from short-term and long-term investments, purchases and sales of equipment, plants, properties, stocks and securities.
  • Financing: Cash from stock purchases, returns of capital, dividend payments and issuing stock or equity. Outgoing cash in this category consists of loans, business debts, notes, lines of credit, factoring and other financing options.

To gauge a company’s financial health, financial organizations and investors may ask to see a cash flow statement. It also ensures your business stays on track in having enough cash when it’s time to pay expenses. An accountant and bookkeeper can help create a cash flow statement.

Companies with extra cash often invest it back in the business to buy property and equipment, expand operations and other activities to grow business.

Working with cash flow forecasting

Use cash flow forecasting to estimate how much money your business brings in on a monthly basis. To get an idea of your sales performance, review your past monthly sales for the last couple of years. (New businesses can do estimates by looking at similar businesses.)

Next, review how much your company spent on a monthly basis for the past couple of years. No doubt, you’ll have the occasional expense that’s out of the ordinary. (Office repairs, for example.) That’s why successful business owners build a cushion with their cash flow. They’re prepared for unexpected expenses.

Now that you have historical data for cash inflows and outflows. You can predict your cash flow levels for the next 12 months.

Ensuring your business has cash available

When the cash flow statement shows a business doesn’t have enough cash for to pay its expenses, it’s insolvent. This put the business at risk for bankruptcy.

An insolvent company isn’t necessarily a failing one in terms of staying busy and serving clients. The problem lies with managing cash flow timing. Here’s an example. A company has $5,000 on May 1. It needs to pay $6,500 on May 15 to cover payroll, vendors, expenses and taxes. If the company can’t find $1,500 between May 1 and 15, then it’ll be in a sticky situation.

With a little planning, the company can avoid this situation. One way is to request customers to pay within 30 days of receiving services or products. Another is to review the timing of when it pays expenses and make adjustments.

You can adjust the timing by asking your credit card company to change the bill cycle. Instead of a May 15 due date when you’re paying many of your expenses, you could request to move it to May 28, a time when you’ll have more cash on hand.

If a business struggles to bring in enough cash to grow the business, it may need to spend money to make money. A small business loan or flexible financing can help the business get working capital to take the next step. If you’re worried about the debt that comes with a loan, you might look into flexible financing with factoring, also known as accounts receivables financing.

With accounts receivables financing, you don’t create debt or need to pay anything back because the money belongs to your business. Instead of paying back a loan with interest, you’re getting the money you’re owed faster and at a discount. For instance, a lender — referred to as a factor — buys your $1,000 invoice for a little less.

While it means not getting the full $1,000, you’re getting the money now instead of waiting until the customer pays weeks or months later. You avoid negative cash flow and continue pursuing your plans to grow business.

Image source: Camilo Rueda López

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