Do you have enough money to pay your company’s expenses, taxes, and bank loans? Is there enough capital to purchase assets? Do you understand your company’s cash position? These types of questions can be answered by performing an accurate, up-to-date cash flow analysis.
Cash flow analysis determines your company’s working capital. By closely examining how your business makes and spends money, you will understand what resources you have to run business operations and complete transactions.
Small Business Owners (SBOs) now, more than ever, need to understand their company’s performance. Mismanagement of cash flow is one of the main reasons why small businesses fail.
What is a Cash Flow Statement?
A cash flow statement provides insight into the cash a company receives from operations and investment sources. It also provides information about cash outflows and where money is being spent for business activities and investments.
Expenses listed on a cash flow statement decrease the amount of available cash.
The information on a cash flow statement should be as up-to-date and timely as possible.
How it Works
The Cash Flow Statement is typically divided into three categories.
Cash receipts from revenue, cash disbursements to pay expenses, and any other normal operations and activities a business uses to produce income are considered Operating Activities.
If your company makes a sale or purchases inventory, pays utilities, rent, or a mortgage, it would be included in this line item. In addition, any cash flows from interest or dividend revenue, interest expenses, and income tax would be considered part of the operating activities.
Investment Activities are cash transactions related to investments and long-term assets. Changes in fixed assets on the balance sheet’s long-term assets section will help you identify these costs.
The purchase of land, buildings, equipment, and other investment assets should be listed here.
Financial activities relate to cash transactions for raising money from debt or stock. They can be identified from changes in equity and long-term liabilities and may include:
- Cash proceeds from issuing capital stock
- Spending cash to repurchase shares
- Receiving cash as a result of issuing debt
- Paying down debt
- Paying cash dividends to shareholders
- Receiving proceeds from employees who have exercised their own stock options
- Cash payments from dividend distributions
- The purchase of treasury stock
How Often Should a Small Business Owner Develop a Cash Flow Statement?
When it comes to how frequently you should develop a cash flow statement, there are a few things to consider.
Many businesses are billed monthly for expenses such as rent, mortgages, or wages. Quarterly cash flow statements may work here, but monthly statements will provide more precise up-to-date data.
At a bare minimum, companies can develop a cash flow statement annually. However, it may not be the most proactive approach to managing a business’s finances.
Whether daily, weekly, monthly, quarterly, or annually, an accurate cash flow statement will provide critical insight into the health of your business.
Common Cash Flow Statement Mistakes
The most common mistake is misclassifying operating, investing, and financing activities. When in doubt, trace the activity back as far as you can to find the financial area from which it originates.
If you aren’t responsible for creating the cash flow statement, make sure you choose someone who has adequate experience with your company’s finances.
Creating an accurate cash flow statement takes time, effort, and diligence; choose wisely when delegating this task.
Failure to Distinguish Between Cash and Non-Cash Transactions
If the original data does not consider how a transaction should be reflected in the cash flow statement and there is no differentiation between cash and non-cash transactions, the problem then bleeds into a failure to consider accounts split between operating, investing, and financing. Make sure all non-cash activities are disclosed.
Cash Flow Management Tips for Small Business Owners
Steady sales and growth are not always enough to maintain cash flow, especially if your accounts receivables and accounts payables are mismanaged. Here’s some core tips you should consider in order to keep your cash flow positive.
Tips for Collecting Receivables
Avoid Unpaid Invoices
If you want to grow your cash flow in a positive direction, then you can’t neglect your accounts receivable. An unpaid invoice is money your business does not have to fund the next stage of its growth. Make sure to establish clear invoicing and payment terms for clients, and don’t be afraid to enforce late penalties or service suspensions until past due accounts are made whole.
For example, last year, some companies in China had to wait twice as long for payment as they did in 2015, resulting in limited growth and expansion opportunities.
Crack Down on Credit
Stop extending credit to every client, especially a client that hasn’t proven they can repay your business. Asking customers to disclose personal and business credit reports will help you identify any warning signs of their inability to repay debts.
Make Realistic Sales Forecasts
Having a positive outlook when it comes to the success of your business is important, but being realistic is critical. Make sure your income statement, cash flow statement, and balance sheet are up-to-date and accurate. This will help you identify the cycles of your business so you can forecast effectively.
Create a Budget and Stick to It
How can anyone possibly run a business without creating even the simplest of budgets? Knowing how much cash is left over after subtracting your total expenses from your total net profits is a straightforward working budget you can start with. Once this is in place, you can begin to examine expenses more carefully and see where money is going out the door.
Keep a Cash Reserve
Saving for a rainy day with at least two to six months of operating expenses is one of the wisest decisions an SBO can make. Whether or not the blip is an emergency or a small bump in the road, having a dedicated cash reserve will ensure that your cash flow remains unscathed. You never know when a client will skip a payment or bail completely.
Grow Slowly and Steadily
Maybe your business is growing so fast, and your cash flow is tied up in up-front costs to meet customer demand which hasn’t come through yet. Maybe you’re opening a new location and need cash to make it happen. In cases like this, consider financing to avoid tying up your cash flow.
Tips for Managing Payables
Many business owners focus on money coming in through accounts receivables to generate positive cash flow. There are some easy tips for managing accounts payables that may help slow the flow of cash out of your business accounts.
Consider the Cloud
One way to reduce expenses and save time and energy on paying paper bills is to use the cloud to manage your payables. Using cloud-based systems also helps SBOs stay on top of scheduling and making payments. You can manage and pay your bills from virtually anywhere.
It’s All in the Terms
Use your payment or credit terms to your advantage. Make sure you know when your payments are due and what penalties accrue when you don’t pay on time. Knowing this will enable you to keep your money in your accounts longer, which is where you want it to be. If you can pay late without penalty, why would you give money away before you have to?
If you want a better interest rate, credit term, or payment schedule, you have to negotiate. If you don’t ask, you won’t know.
Make a Priority List
Sometimes SBOs are faced with a cash shortage. When this happens, you may end up deciding which bills to pay and which invoices have to wait. Be prepared with a priority list of vendors who you rely on most to bring in revenue and pay them first.
Anticipate Big Bills and Plan Accordingly
A company investing in more extensive facilities, better equipment, or a larger workforce will inevitably receive larger bills. When you anticipate the arrival of these costs, you are better positioned to schedule your other expenses accordingly. This will alleviate a dip in cash flow and allow your business to continue to run smoothly.
How to Prepare For and Weather a Cash Shortage
It’s an unpleasant side to business, but when a cash flow shortage strikes, here are a few ways to weather the storm:
- Re-evaluate your business plan and cut your expenses.
- Send invoices earlier and more frequently; collect on past-due accounts.
- Ask customers for partial payments or deposits up-front instead of billing them after services are rendered.
- Negotiate your payables by delaying or cutting the amount of cash you spend.
- Bring money into your company by getting a low-interest loan or credit card.
- Sell a piece of ownership to generate cash; this may also bring in a new business partner.
- Let go of non-essential assets; selling them can quickly raise some cash.
Successful small business cash flow management depends on preparation and prevention. Cash flow analysis and cash forecasting are powerful tools SBOs can leverage to sustain and grow their business.
Automating functions to help track and manage cash flow inevitably frees up valuable time SBOs can reallocate to what’s important: generating revenue.
If you want to learn more about how Trovata’s cash-management platform can save your small business time and money, check out the Emerald Case Study to see how they’re saving resources in real-time.