The Basics of Small Business Cash Flow

small business cash flow

 Understanding Business Cash Flow

Correctly managing your company’s cash flow is one of, if not the most important aspect to running a successful business. A cash flow statement charts the movement of money in and out of your business. The statement shows change over time rather than outright dollar amount at a specific point in time. Cash flow statements use information from the company’s balance sheet, which gives a summary of the net worth of a business on any given day, and from the company’s income statement, which is a report of sales and expenses during a specific period. The difference between the cash flow statement and the income statement is that the income statement accounts for non-cash accounting factors like depreciation.

A small business’s cash flow statement is important as it tells the company whether it has enough money available to pay its expenses and buy resources and assets. The statement essentially shows the net increase or decrease in cash for a specific period of time and are divided into three parts: operating activities, investing activities, and financing activities.

Operating Activities

The operating activities part of the cash flow statement evaluates a business’s cash flow from net income to losses. This section also brings together the net income and the actual capital the company obtained from or used in its operating activities. In order to do this, the net income for any non-cash items is adjusted as well as the cash that was used or provided by other operating charges. This is the most accurate calculation of how much money your business has generated.

Investing Activities

The investing activities section of the report shows the cash flow from all investing activities, which typically include purchase or sales of long-term assets, like property or equipment, in addition to investment securities.

Financing Activities

Financing activities shows the cash flow from activities like selling stocks and bonds or borrowing from banks. Paying back a bank loan would also show up as a use of cash flow.

What Not to Do with Your Startup’s Cash Flow

Now that you understand more about exactly what business cash flow is, let’s discuss some common mistakes that small business owners tend to make and how to avoid them.

Overestimate future sales volumes

When it comes to estimating future sales volumes be sure to form realistic goals and objectives. Of course, estimations are never exact, but extreme over or under projections can cause major cash flow problems. To form goals for your startup, research past data in your industry and base your future sales projections off of that historical research. To obtain industry research use resources available to you such as the internet, published studies and any business connections you may have who can act as a mentor to you.

Overspend during the startup phase

Be careful not to overspend during the start phase of your new business. Overspending is extremely common and can ruin your cash flow. Create and implement a strict and realistic budget and follow it. Use an excel spreadsheet to analyze your current sales and create a budget based off of how much you can spend per month without going overboard. When first starting out, small business owners should analyze their financial projections and buy as little inventory as possible without worrying about running out.

Accept late payments from customers

As a small business, you cannot afford to accept late payments from customers because it will drastically weaken your cash flow. Create penalties for late payments and make sure your customers are aware of them. It’s important that you hold customers accountable for late payments the first time it happens so that it does not occur again. Some businesses find it helpful to offer some sort of incentive for their customers to make payments early, this cuts down on your collection duties as well as eliminates the stress of cash flow problems. If you’re customers are taking too long to pay but are still paying within the 30 or 60-day timeline, services such as factoring your accounts receivable and small business loans are available to you.

Factor Finders works with small and mid-size business owners to provide cash flow factoring solutions. Small business factoring provides a steady stream of cash flow. Many businesses fall victim to cash flow problems due to late payments. Factoring companies will purchase your outstanding invoices and advance your company the cash it needs to operate as usual.