Cash Flow: The Life Blood Of Your Business

According to some business experts, having a healthy stream of cash flow is more important than your business’s ability to deliver its goods and services!

That’s a hard pill to swallow, but 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. But if you fail to have enough cash to pay your suppliers, creditors, or employees, you’re out of business! This cash flow guide was developed by Metro Accounting And Tax Services, CPA to help the small business owner navigate the choppy seas of running a business and being cash positive. For all your accounting needs please call the office at 470-240-5143 for expert advice and guidance.

Cash flow, simply defined, is the movement of money in and out of your business; these movements are called inflows and outflows. Inflows for your business primarily come from the sale of goods or services to your customers. The inflow only occurs when you make a cash sale or collect on receivables.

Remember, 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.

A certified accountant is the best person to help you learn how your cash flow statement works. Please contact us and we can prepare your cash flow statement and explain where the numbers come from.

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.

Theoretically, even profitable companies can go bankrupt if they lack the cash flow and are unable to pay their bill when they become due. 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 business.

Analyzing Your Cash Flow

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.

·         Credit terms. Credit terms are the time limits you set for your customers’ promise to pay for their purchases. Credit terms affect the timing of your cash inflows. A simple way to improve cash flow is to get customers to pay their bills more quickly.

·         Inventory Management. Inventory describes the extra merchandise or supplies your business keeps on hand to meet the demands of customers. An excessive amount of inventory hurts your cash flow by using up money that could be used for other cash outflows. Too many business owners buy inventory based on hopes and dreams instead of what they can realistically sell. Keep your inventory as low as possible.

·         Cashflow Gaps. 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.

Avoid running into cash flow problems
As a small business owner, you might be concerned with how to avoid running into cash flow problems in the first place, and if these problems exist, what’s the best plan of action to mitigate and reverse these trends in your business.

Plan cash flows. A failure to properly plan cash flow is one of the leading causes of small business failures. Experience has shown that many small business owners lack an understanding of basic accounting principles. Knowing the basics will help you better manage your cash flow.

A business’s monetary supply can exist either as cash on hand or in a business checking account available to meet expenses. A sufficient cash flow covers your business by meeting obligations (i.e., paying bills), serving as a cushion in case of emergencies, and providing investment capital.

Prepare a cash flow statement. Preparing, monitoring and managing your cash flow statement is critical to the effective and efficient running of any business operations. This aid in assessing the vitality of the business entity. The first signs of financial woe appear in your cash flow statement, giving you ample time to recognize a forthcoming problem and enough breathing space to deal with the underlying issues. With the periodic cash flow analysis, you can head off any unpleasant financial glitches and avoid unwanted surprises. You’ll be able to dial into the root cause of the problem and recognize aspects of your business that have the ability to cause and exacerbate cash flow gaps.

As always, the CPAs at Metro Accounting And Tax Services, stand ready to assist you with your cash flow or any other accounting issues you are experiencing in your business. Call the office today at 470-240-5143 for expert guidance.

User | 4/11/2017