2014-11-18 00:00:00 Cash Flow English Financial Analyst Tomasz Popiel shares tips to ensure your startup doesn't run out of money. https://quickbooks.intuit.com/ca/resources/ca_qrc/uploads/2017/03/Two-Women-Discussing-What-Finances-They-Need-To-Start-Up-A-Buisness.jpg https://quickbooks.intuit.com/ca/resources/cash-flow/cashflow-101-what-you-need-to-know/ Cashflow 101: What You Need to Know

Cashflow 101: What You Need to Know

5 min read

Your business needs a steady supply of cash to operate successfully. Having a system in place to monitor this cash flow means you can protect your business and keep your bank account balance healthy. Keep in mind these cash flow basics to make sure you have cash available when you need it.

Cash Flow Basics

If your bank balance is greater than zero, you’re still in business. But that single number doesn’t tell the whole picture of where your business is going. For example, your bank balance doesn’t tell you about cheques you’ve written that aren’t cashed. More importantly, a bank balance doesn’t tell you how much others owe your business and when you can expect these funds. It also doesn’t tell you how much your business owes others and when these amounts are due.

Cash flow refers to the movement of money as it comes in and goes out of a business each month. Merchandise sales, accounts receivable payments, and loans are examples of incoming cash flow.

Outgoing cash flow includes things like money spent on rent, utility payments, and office supplies. If your business takes in more money than it spends, then it is in a position of positive cash flow, which means you have enough money to meet your business’s operating expenses.

Tracking Cash Flow

With numerous transactions occurring on a daily basis, it’s easy to lose track of the amount of cash coming in and flowing out of your business. A cash flow statement can help. A cash flow statement is a summary of the cash received and spent by a business. It gives you an overview of your business’s income and expenses and can be generated monthly or annually as required.

Turn to the cash flow statement when you’re looking for valuable financial planning information about business gains and overspending. It highlights the business processes that generate cash and points out areas where spending cutbacks are necessary.

The best way to ensure your business maintains a positive cash flow is by tracking the numbers constantly. A standard cash flow statement includes three categories: operations, investing, and finance. These three categories include sub-categories for keeping track of cash received or spent on specific items. The operations category is usually the largest and involves the most updating.

Breaking cash expenditures down into bite-sized chunks makes it easier to see if you’re spending too much and too quickly – or whether you can afford to spend more in certain areas.

Businesses use either the direct or indirect method when creating cash flow statements. The direct method is more detailed, categorizing items such as cash receipts as major operational activities. Using the direct method, cash flows from operating activities are reported as major classes of operating cash receipts and disbursements.

Examples of receipts under the direct method include cash collected from customers and cash received from interest and/or dividends. Examples of disbursements under the direct method include cash paid to suppliers for goods, cash paid to employees for services, cash paid to creditors for interest, and tax payments.

The indirect method uses net income as a starting point. It makes adjustments to net income for non-cash items and then makes adjustments for all cash-based items. Non-cash items that are taken into account include depreciation, amortization, account receivable loss provisions, and losses from the sales of fixed assets.

The net income line items are also adjusted for changes in the ending and starting balances of current assets (with the exception of cash). The same type of adjustments must be made for changes in current liabilities. Most businesses prefer the indirect method because of its simplicity.

While using pen and paper is the easiest and quickest means to track, monitor, and report on your transactions and the cash in your business, it can be error-prone and cumbersome. Using a spreadsheet is another option. Spreadsheets are a quick and versatile way to get started if you’ve already got spreadsheet basics under your belt. But, similar to the pen and paper method, spreadsheets can be error-prone and time consuming.

Accounting software such as QuickBooks is often used by small businesses to track, monitor, and report cash flow. With one integrated package and several reporting options, accounting software helps you complete your cash flow analysis with a minimum of fuss.

How do you determine which method works best for you? Focus on picking one that you know you are going to use, that is reliable, and that is something you can understand.

Cash Flow Cycles

Every business has a natural cash flow cycle. Funds ebb and flow at certain times. Reviewing monthly cash flow statements helps you recognize cyclical patterns. Understanding and analyzing these monetary cycles can lead to wiser decisions. For instance, you can better determine when to make a major purchase or when it’s time to seek additional capital from investors.

Your cash flow cycle length is essentially the amount of time from the start of production, when you begin the service or purchase materials, to when you sell the service or product and collect your cash. The longer your cash flow cycle, the longer you have money tied up in the business that you can’t use for other purposes.

Ideally, each cash flow cycle will generate some profit and therefore will generate free cash. The higher your profit margin, the more cash you will generate. There are a few things you can do to manage the length of your cash flow cycle and generate the highest amount of positive cash in each cycle.

Because cash flow is so critical to your business, remember to keep a close eye on your customers and their payment habits. Encourage your customers to buy more and pay their bills promptly. As they are shopping, perhaps present them with related items and add-ons that make their purchase more valuable. Consider invoicing them quickly or asking for payment up front.

Special incentives for paying early often yield positive results. You might offer customers who pay within 14 days rather than the stated 30 a small discount such as 2% off their bill. And you can’t afford to ignore customers who habitually pay late or not at all. Using financial software makes it easy to see customers’ track records, flag those that need to be followed up on, and send appropriate payment reminders.

On the flip side, it’s smarter for you to pay your business’s bills on the day they’re due so you can keep money in your accounts as long as possible. Financial software such as QuickBooks makes it easy to set up notification features to remind you when bills are due so you can pay at the last minute without ever worrying about late payments.

Whatever you are thinking of purchasing, it’s a good idea to get in the habit of first checking your current and projected cash flow first. This helps you see if you can really afford whatever it is at this time. Managing cash flow now can increase your profits down the road. Improve your cash flow with invoices, payments, and expense tracking. See how much cash you have on hand with QuickBooks.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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