Cash Flow Analysis for Small Business Owners
Cash flow is the movement of money into and out of your business. You need to keep an eye on it at all times. It's important for ensuring solvency of your company; without cash flows, 82% of businesses would fail according to Jessie Hagen from U.S Bank Group.
Cash flow analysis is the study of how much money is coming in and going out of your business. You want to make sure that you always have enough cash so that your company can survive, but you also want to be able to plan for future purchases based on what needs arise.
How is Cash Flow Analysis Performed?
Cash flow analysis deals with breaking down the components of your business that affect cash flow, such as what accounts might be receivable, what inventory you have on hand, and how much is owed to other companies. Doing a cash flow analysis on these separate components can help identify potential problem areas and ways to improve your cash flow overall.
You can conduct a cash flow analysis in two ways:
Compare the total of your unpaid purchases against the total sales due at the end of each month and see if you'll need to spend more than you're received. If so, then there could be an issue with your business' cash flow.
Perform a detailed cash budget for your company which will examine future expenditures, as well as expected income and savings over time.
The key here is examining whether or not you have enough money coming into the company to cover fixed operating costs on top of any unexpected expenses that might arise throughout the year.
Examples of the Importance of Cash Flow Analysis
Cash flow analysis is one of the most important financial metrics for startups or businesses undergoing rapid expansion. It's imperative to continuously monitor cash flows, as they determine whether a business will be successful in the short and long term.
It is important for seasonal businesses to be aware of cash flow, as it can help a business anticipate which customers may be slow payers.
Solving Cash Flow Problems
Sometimes cash flow problems are simply due to a lack of knowledge. Self-employed business people tend to be too busy with their day-to-day tasks--they can also fall behind on payment collection and paying bills,
and they may mess up record keeping practices among other things. With so much going on it is easy for them to get tangled in the details they need in order to handle cash flows properly.
Cash flow is a big deal for business owners. There are many things that can be done to keep cash flowing, such as investing in accounting software or hiring a bookkeeper. Businesses that have chronic cash flow problems may want to consider taking out loans or getting lines of credit.
Talk to one of our cash flow advisors today for help in implementing cash flow management properly in your business.