What’s one of the top challenges in small business accounting? Cash flow management.
The average small business only has enough available cash to cover just under a month of expenses – much less than the three to six months most experts advise.
Understanding how cash flow works, how to make a cash flow statement, cash flow problems and how to manage your cash can save you the headache of constant budgeting problems. Here’s what you need to know to keep your company’s cash flow on target.
Cash flow is simply the movement of money into and out of your business. Having positive cash flow means you’re bringing more in than you’re paying out, which is ideal for any small business.
You want to avoid expenses exceeding available cash at all costs. This results in negative cash flow, and can tank your business.
Cash flow calculations include actual cash and “cash equivalents,” such as short-term bonds, commercial papers and marketable securities. The latter are considered part of cash flow because they’re liquid assets and can provide your business with a ready source of money if need be.
There are several different types of cash flow, and all are included in the general definition:
What is operating cash flow? That’s the money you generate doing business. It doesn’t include investments or other outside sources of income – just whatever you get from running your company day to day.
When you subtract money spent on assets from operating cash flow, you get free cash flow. This is the amount accessible to investors and creditors; basically, it’s the money you don’t tie up in business activities.
Cash flow ratios show how money coming into your business relates to expenses, sales and debts. Knowing these ratios helps you determine your company’s viability. Specifically, if you’re currently equipped to pay off short- and long-term debts.
To understand how these different aspects of cash flow affect your business, you need to make a cash flow statement. This financial document includes three sections:
Putting the numbers from these categories together gives you the total cash and cash equivalents for your business during a given period, minus expenses. If you find the math confusing or aren’t sure what to include, try using a cash flow calculator as a guide.
How often should you prepare a cash flow statement? Monthly statements make sense for several reasons. First, you get a concrete picture of how much you’re bringing in versus how much you’re spending. Second, it creates an ongoing record of your company’s financial health.
With this information on hand, it’s easier to see where you need better cash flow management strategies. It’s also important to have documentation when meeting with investors and lenders. They’ll look at the numbers in your cash flow statement when determining whether to extend funding to your company.
Note that cash flow isn’t the same as net income. Net income factors in sales made on credit. If the money from those sales hasn’t actually come in when you prepare your cash flow statement, it can’t be counted as available cash.
In addition to creating cash flow statements, you should also perform a periodic cash flow analysis. Analyzing how money moves in and out of your business alerts you to potential problems. It can also help you pinpoint which areas of your operation these problems stem from. Catching these problems early – and taking steps to correct them – can prevent your business from getting caught in a cycle of negative cash flow.
A cash flow analysis considers:
This gives a snapshot of your current cash flow status. You get less detail than with a full statement, but can still see whether your finances are on track.
When you have all the important numbers at your fingertips, it’s time to make cash flow your number one priority. Here are a few cash flow management tips to get you started:
Finally, you always want to maintain a cash buffer. Preparing statements and analyzing them should ensure you have enough money available to keep your business running. However, you can’t predict every possible circumstance.
Like most other areas of business, there are always external factors. What could throw off your meticulous cash flow calculations?
Seasonal businesses have even more variables. You may need to hire additional employees or stock up on inventory ahead of a busy season. Your e-commerce software could require updating to handle a higher volume of orders. Any of these scenarios could seriously impact your cash flow if you don’t have enough in reserve.
Despite the unknowns, it doesn’t hurt to prepare a cash flow model. Modeling involves using past cash flow information to forecast where your business will get money and plan how to spend what comes in. The formula is simple:
Ideally, you should end up with more than you started with. Of course, this won’t happen for every projection, just like it doesn’t happen on every cash flow statement. What you’re looking for is an upward trend over time to ensure your business remains viable and healthy.
If your cash flow statements, research and models all show you can’t bring in enough to cover expenses or don’t have a sufficient buffer to handle the unexpected, it’s time to consider small business funding.
Financing and loans can provide cash to put toward business operations or invest in growth. Spreading out payments over months or years allows you to incorporate the debt into your projections, keeping cash flow stable.
If your business needs extra money to cover expenses or boost cash flow, consider these loan and financing options from National Business Capital & Services:
With low or no FICO requirements, National’s funding products are suitable for businesses in any financial situation. No matter what your cash flow looks like now, you may be eligible for funding to cover your short-term expenses and meet long-term goals.
Contact an advisor at National to learn more about your cash flow funding options and payment terms.
National Business Capital & Services is the #1 FinTech marketplace offering small business loans and services. Harnessing the power of smart technology and even smarter people, we’ve streamlined the approval process to secure over $1 billion in financing for small business owners to date.
Our expert Business Financing Advisors work within our 75+ Lender Marketplace in real time to give you easy access to the best low-interest SBA loans, short and long-term loans and business lines of credit, as well as a full suite of revenue-driving business services.
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Matt Carrigan is the Content Writer at National Business Capital & Services. He loves spending every day creating content to educate business owners across every industry about business growth strategies, and how they can access the funding they need!