Cash flow proves critical for small business survival, and a positive cash flow can keep your margins right where you need them to be. Keep your small business running smoothly by managing your cash flow using financial ratios and automating accounting processes and by finding ways to get paid faster.
Financial Ratio Analysis for Cash Flow Profitability
Everyone wants to grow, but before preparing for growth tomorrow, you need to know where you stand today. Measuring and tracking your progress helps you accomplish this. Successful business owners use financial ratios to track cash flows and profitability over time. The current, profit margin, and working capital turnover ratios are the most common ratios used to track cash flow and profitability. Most banks use these same cash flow and profitability ratios to get a clear picture of your situation before providing small business financing.
Divide current assets by current liabilities to find out whether you have enough cash flow on hand to cover your current operating expenses and needs. Current operating expenses include things such as wages, raw materials, and inventory. This calculation is called your current ratio. A current ratio above 1 means you can cover your expenses, but ratios less than 1 suggest a cash flow shortfall. Try to shoot for a 2 to 1 ratio, though this ratio may vary depending upon your business’s industry and niche.
Use the profit margin ratio to determine what percentage of sales you keep after paying expenses. Calculate this ratio by dividing net income by total sales. Look for higher profit margin numbers when you want to keep a higher percentage of sales.
Figure the working capital turnover ratio by dividing net sales by net working capital to find out if you generate enough sales to replenish working capital needs. Compare the money you make in sales with the money used to fund operations. In general, the higher the ratio, the more efficient your business.
Automating Small Business Cash Flow Management
Calculating these ratios serves as an important first step in knowing where you stand financially. You can also automate the financial analysis process by investing in accounting automation software. These productivity software options are simple to implement and can immediately impact your bottom line. Implementing some applications such as Quickbooks only takes a matter of days.
Get Paid Faster
In addition to automating financial ratio calculations, focus on small business cash flow management by discovering ways to get paid faster. Invoicing immediately increases your likelihood of getting paid fast, and a free invoice generator such as the QuickBooks Invoice Template can automate this process for your business. You can also directly invoice through Quickbooks Online, which not only makes it easy to create an invoice and submit it directly to your customer or vendor but also automatically calculates sales tax based on the current rates for your province or territory, saving you both time and effort.
Having more than one source of cash flow gives you options when it comes to keeping your small business sustainable. Fortify your business for sustainability by focusing on financial ratios and account automation. This puts you in a position to develop additional cash flow streams by automating basic business functions such as bookkeeping, accounting, accounts payable, and accounts receivable. From a cash flow and profitability perspective, automation of these functions can add years to your business life. Improve your cash flow with invoices, payments, and expense tracking. See how much cash you have on hand with QuickBooks.