Let’s Talk About Cash Flow!
The amount of money entering and leaving your business over a given period of time is known as cash flow. Understanding what it is and how important it is will help you manage your accounts and ensure you always have enough funds available to pay your bills and grow your business.
As a business owner, every new sale is exciting. Watching your revenue grow is extremely rewarding, but it can be easy to get distracted by these numbers and your cash flow. Even if you’re taking in lots of sales, you can still find yourself cash-strapped if the money from those sales doesn’t reach your bank account in time to meet your monthly obligations. In other words, if you aren’t careful it can have devastating consequences for your operations. Statistically, 28% of small business owners say that cash flow has been the major challenge for their business with only 40% of them considered profitable. With 50% small business owners nowadays starting from home, 31% Small Businesses are severely affected or closed due to Covid-19. The lockdown period and related restrictions affected the functioning of small businesses, and almost 70% of services got shut down in March 2020. So if you are running a business, you need to prioritize maximizing your revenue while keeping your expenses low.
These days it is extraordinarily critical.
Regardless of your outlook on the economy, it’s always better to be prepared. Paying attention to news outlets and financial media sources infuses us with knowledge that interest rates have soared four times in 2022 to combat the ever-worsening inflation that’s jeopardizing our American way of life, and the reality is that there will likely be more interest rate hikes in the future. And while the effects of inflation can be seen in all areas of the economy, the burden often falls the heaviest on small business owners, where they face many of the same recession risks as larger business, but lacking the ability to scale making them more vulnerable of increased risk that comes with competition and the risk of failure in a downturn..
The business owner with a healthy cash flow is able to meet their existing financial obligations as well as plan for their future. Also, Business owners with the most capital also come out on top after an economic downturn.
To better prepare, it is key to prioritize cash flow strategies in your business planning, which by design exist to make a positive impact on how much money is actually going to move in and out of your company, now and in the future. Before identifying those strategies, let’s break down the three formulas that are essential to knowing how much money is flowing in and out of your business at any given time, and how to calculate them.
The three main formulas that can help you calculate cash flow: free cash flow formula, operating cash flow formula and cash flow forecast:
- Free cash flow refers to the resources available for distribution among all the stakeholders in the company. It shows you how much capital you have to reinvest in the business – such as purchasing new equipment, expanding your store, or investing in a new product for your company.
- The operating cash flow formula provides an at-a-glance view of the day-to-day cash flow within your business.
- The cash flow forecast provides a future look at your cash flow in the coming month, quarter or year.
All three of these formulas are essential to knowing how much money is flowing in and out of your business at any given time:
- Net income + Depreciation ÷ Amortization – Change in working capital – Capital expenditure = Free cash flow
- Depreciation + Operating income – Taxes + Change in working capital = Operating cash flow
- Beginning cash + Projected inflows – Projected outflows = Ending cash = Cash flow forecast
Below are 6 key strategies to a Business Owner’s healthy cash flow:
(1) Have Financial Relationships in Place – Leverage Leverage Financing Solutions to Help You Meet Your Goals
Have financing relationships in place before you need capital, especially if there’s uncertainty on the horizon. A fallacy that many business owners have is to leverage financing only when their business faces an emergency, but in reality, many savvy entrepreneurs use small business loans to support their growth, allowing them to increase their productivity and streamline their success. Also, with regards to business financing, one of the three major factors lenders look at are cash flow. The other two factors are credit and collateral. When businesses can demonstrate all three they stand a good chance of getting the funding they need. However, all too often something is missing and usually it’s a lack of collateral since many businesses typically do not own buildings, valuable machinery or inventory that could easily be liquidated. Thinking ahead and continuing to forge financial relationships can positively secure and position a business owner’s cash flow.
(2) Schedule Time Working On Your Business vs In Your Business
Too often business owners get caught up in their day-to-day core business owner craft, while assuming that their original business plan strategies never need restructuring. While it is easy for a business owner to get caught up in the day to day operations and avoiding what it means to monitor or take inventory on what may not be maximizing the amount of cash flow kept or coming in, this can put a business owner in a risky state. Businesses that continuously make a habit of looking for ways to improve things like operational efficiencies and taking advantage of technologies that streamline business processes- these businesses will position themselves better when it comes to increased cash flow and profitability.
(3) Implement New Technologies and Build Strategic Partnerships That Align with Your Business Ownership Philosophies
Business owners can increase their productivity and gain better control over their cash flow by implementing technological improvements in their operations. For example, if you commonly deal with projects that have a lot of moving parts, then a project management application could help you increase your efficiency and ensure that your team is all on the same page. Another example is security monitoring or theft prevention for businesses that deal with high levels of crime or consistently lose inventory to theft.
While some of these advancements are free of charge, there are somewhere the price stands as a significant hurdle for businesses trying to implement these systems. It can be difficult for any entrepreneur to afford a sizable expense, especially if they’re investing their profits back into the business, but businesses have to look at the bigger picture. What would the organization look like after the change? Would the business owner generate more revenue? Save more in expenses?
If the answer points to being stronger after the fact, it might be worthwhile to consider securing capital to help you afford the expense.
Tip: In today’s world where businesses models are constantly being scrutinized or commoditized next to rival platforms-how a product or service has become identical to the same type of offering presented by a rival, distinguished only by its price- you see it for example in business healthcare deliveries where health markets offer specialized group healthcare packages. Even traditional tax advisors on all levels have become more niche-focused by industry or by specialty. So it is more critical today for business owners to be proactive with keeping up with modern technologies, as well as to align with unique and like-minded strategic professional partnerships where together there is an added value brought forward by collaborating, which is an added nuance that can lead to future increased cash flow.
(4) Project Your Cash Flow
Determining when you’ll receive – and spend – money is part of the budgeting process. To successfully project cash flow, assess your prior year’s numbers as a basis of cash flow for the following year. Then, adjust for anticipated changes, such as new pricing, and more personnel and funding sources. As the year unfolds, you should update your cash flow projections to accurately reflect developments in expenses and profits. Comparing budgeted cash flows to actual deposits and expenditures helps you predict cash flow later. Another strategy is to add the cash you already have to the money you plan to receive. Then add up how much of that money you anticipate spending.
(5) Prepare a Cash Flow Statement
Cash flow statements are indicative of your company’s health. They show that you have a healthy business capable of continuing operation at any given time.
You can find a lot of extensive breakdowns on cash flow statements. Here are some basic terms and elements of a cash flow statement you’ll need to know in order to create and read yours.
Cash from operating activities: This is how much money is flowing into your business. If this number is lower than net income or it’s a negative number, this could be a problem.
Cash from investing activities: This should be a negative number. This includes money your business has used to invest in itself and its products. Buying supplies or further developing your product are two examples of this kind of activity.
Cash from financing activities: This area demonstrates how much money your company is spending to pay off certain obligations. This can include things like dividends.
Net change in cash: This is how much cash your company gains or loses based on the investing and financing activities.
Net cash: Net cash can be highlighted as the beginning and ending balance. The ending balance is determined by applying the net change in cash to the beginning balance. The ending balance shows how much cash you have on hand.
(6) Keep a Detailed Budget
Sales are obviously the best way for a business to gain cash flow. If you are not generating sales, you’re not really a business. Naturally, saving money in operational expenses helps, too. So it is important to have a detailed budget and to curb unnecessary spending.