What is considered a good cash flow? And what are the characteristics of a strong statement of cash flows? These are questions many South African small business owners ask when they first start preparing cash flow statements.
While you might already be reviewing your cash flow statement each month, there are several key factors to pay extra attention to. For example, are you generating enough positive cash flow? Or is it time to tweak your business strategies? For a small to medium-sized business or a startup, this is doubly important as you’ll feel the effects of a poor cash flow sooner. This also means tweaking a poor or inefficient process is much more feasible.
Here are three important factors that determine the health of your cash flow.
You have positive cash flow from operating activities
The foremost requirement of a healthy business is its ability to generate more cash than it spends. As such, your business’s core operations should consistently grow your net cash flow over time. Failure to do so would mean your business might have to rely on external financing to keep it afloat, which is not sustainable in the long term.
Your customers pay on time
Late payments frequently contribute to an unhealthy cash flow, as business owners are forced to shoulder unnecessary expenses such as overdraft fees as a direct consequence.
To minimise delayed payments, you should calculate your debtor days (the average time it takes for your customers to pay you) and work out what an acceptable number of debtor days is. Generally, the acceptable number of debtor days will depend on your credit terms and business model, but the lower the number, the better.
To encourage your customers to pay quickly, it’s a good idea to use invoicing software to automate your invoicing process. If you have regular customers, you can schedule invoices to be generated and sent automatically, along with payment reminders for missed due dates.
Your investments are funded by cash, not financing
Although from time to time having positive net cash flow from financing activities is necessary when expanding your business, ideally it should be the exception rather than the rule. This suggests the company is using its cash flow from operating activities to pay off external financing and issue dividends, instead of taking out new loans.
Simply put, it reassures investors that the fundamentals of the business are strong enough and that it can pay for its own growth, instead of relying on one-time gains such as selling its assets or raising funds.
Getting a complete cash flow statement can be a quick and easy process or it can be a slow, laborious and costly one. Because it’s a vital part of being aware of how well your business is actually performing, selecting accounting software will make all the difference.
QuickBooks gives you all the diagnostic tools your business needs to stay healthy. Get a first-hand look at how it can help you manage your books with ease. Try it free for 30 days.