Let’s start at the beginning. Cash flow is the money that flows in and out of your business. It’s either:
- Cash coming in from customers when buying your products or services, or
- Cash going out of your business in the form of payments for expenses, like rent or a mortgage, in monthly loan payments, and payments for taxes etc.
And, with 82% of small businesses going out of business because of cash flow issues, it’s a vital part of your business that needs to be managed effectively.
Why should you stay on top of your cash flow?
To make sure you’re in the 18% of businesses that understand the importance of your cash flow, here are eight excellent reasons to keep on top of it.
1. You know you can pay your bills
Creating a cash flow forecast (we’ll come on to that in a bit) will help you know whether you have the cash to pay your invoices, suppliers, and bills. It’s the best way to know how much money your business has or will need for a given period.
2. Manage late payments
You’ll practice better credit control, making sure you get paid on time, reducing the potential for late payments, or not being paid at all.
3. Understand your working capital
Keeping an eye on your cash flow helps you plan upcoming cash in and cash out to better understand your working capital now and in the future.
4. Stop overspending
It will show you precisely what money you have available to spend and the impact a purchase will without worrying if you’re overspending.
5. Grow your business
If you’re thinking about expanding your team, by modelling increased wages against the added revenue new staff will bring in, you can be confident you can afford to take on more staff.
6. Free up cash flow to invest in new products
A regularly updated cash flow forecast lets you see how much money you can afford to invest in your business and when is the right time to do so.
7. Regulate lumpy cash flow
Project-based work can sometimes result in inconsistent or fluctuating payments making it harder to keep an eye on your cash position. By keeping an up-to-date cash flow forecast, you can act sooner and more effectively to even out those lumpy cash flow periods.
8. Budget for tax payments
You can calculate your expected tax payments and allocate a budget for them. No nasty surprises when your tax bill arrives.
Using a Cash Flow Statement
The best way to keep track of cash flow in your business is to run a cash flow report. This report shows the cash you receive and the cash you pay out to show your business’s cash position at the end of every month.
They are a valuable tool because they show you:
- Liquidity – how much operating cash flow you have so you know what you can afford
- Changes in assets, liabilities, and equity – in the form of cash outflows, cash inflows and cash being held
- Predict future cash flows – plan how much liquidity your business will have in the future
They do this by looking into three sections: operating activities, investing activities, and financing activities.
If your statement shows a negative number at the bottom, you’ve lost cash during the accounting period. That’s not always a bad thing because some months you might have to spend some money to make money later.
In the same way, a positive number at the bottom isn’t always a good thing. There could be a negative reason for the increased liquidity, such as taking on a large loan to bail out a business.
Of course, rather than adding this to your ‘things to do’ list, your bookkeeper will be able to maintain your cash flow statement for you, so you’re always on top of your financial position.