Cash flow is the lifeblood of any small business. Some business experts even say that a healthy cash flow is more important than your business’s ability to deliver its goods and services! Consider this: if you fail to satisfy a customer and lose that customer’s business, you can always work harder to please the next customer. If you fail to have enough cash to pay your suppliers, creditors, or employees, then you’re out of business!
What is Cash Flow?
Cash flow is the movement of money in and out of your business; these movements are called cash inflows and outflows. Inflows for your business primarily come from the sale of goods or services to your customers but keep in mind that inflow only occurs when you make a cash sale or collect on receivables. It is the cash that counts! Other examples of cash inflows are borrowed funds, income derived from sales of assets, and investment income from interest.
Outflows for your small business are generally the result of paying expenses. Examples of cash outflows include paying employee wages, purchasing inventory or raw materials, purchasing fixed assets, operating costs, paying back loans, and paying taxes.
Our local CPA firm, Linda A. Stortz, CPA, P.A., is the best resource to help you learn how about a cash flow statement, prepare your cash flow statement, and explain where the numbers come from.
Cash Flow versus Profit
While they might seem similar, profit, and cash flow are two entirely different concepts, each with entirely different results. The concept of profit is somewhat broad and only looks at income and expenses over a certain period, say a fiscal quarter. Profit is a useful figure for calculating your taxes and reporting to the IRS.
Cash flow, on the other hand, is a more dynamic tool focusing on the day-to-day operations of a business owner. It is concerned with the movement of money in and out of a business. But more important, it is concerned with the times at which the movement of the money takes place.
In theory, even profitable companies can go bankrupt. It would take a lot of negligence and total disregard for cash flow, but it is possible. Consider how the difference between profit and cash flow relate to your small business.
Analyzing your Cash Flow
The sooner you learn how to manage your cash flow, the better your chances for survival. Furthermore, you will be able to protect your company’s short-term reputation as well as position it for long-term success.
The first step toward taking control of your company’s cash flow is to analyze the components that affect the timing of your cash inflows and outflows. A thorough analysis of these components will reveal problem areas that lead to cash flow gaps in your business. Narrowing, or even closing, these gaps is the key to cash flow management.
Some cash flow gaps are created intentionally. For example, a business may purchase extra inventory to take advantage of quantity discounts, accelerate cash outflows to take advantage of significant trade discounts, or spend extra cash to expand its line of business.
For other businesses, cash flow gaps are unavoidable. Take, for example, a company that experiences seasonal fluctuations in its line of business. This business may normally have cash flow gaps during its slow season and then later fill the gaps with cash surpluses from the peak part of its season. Cash flow gaps are often filled by external financing sources. Revolving lines of credit, bank loans, and trade credit are just a few of the external financing options available that you may want to discuss with us.
Monitoring and managing your cash flow is important for the vitality of your business. The first signs of financial troubles appear in your cash flow statement, giving you time to recognize a potential problem and plan a strategy to deal with it. Also, with periodic cash flow analysis, you can head off those unpleasant financial problems by recognizing which aspects of your business have the potential to cause cash flow gaps.
You can make sure that your small business has adequate funds to cover your day-to-day expenses by contacting us today. We can help you to help analyze and manage your small business cash flow.
As a CPA, Accredited Small Business Consultant and Advanced Certified QuickBooks ProAdvisor, we mentor small business owners to empower them with the knowledge and skills to run a successful business. Allow us to evaluate your small business needs. Give us a call today at (727) 391-7373 or visit us at http://www.LStortzCPA.com and www.tampabayaccountingservices.com.