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How to Manage Your Small Business Cash Flow

A constant thing to remember is that while your company may be reporting profits, the cash flow may be detrimental. This is where the essence of tracking your business cash flow is brought up; to prevent the liquidation of your business. If you’ve been wondering how to go about the management of your small business cash flow, then this is the right article for you.

small business cash flow
The cash flow report is the formal way of managing your small business cash flow and it can be calculated daily, weekly or monthly (© Pexels)

Cash Flow Definition

The net of cash inflow and cash outflow lies at the core of explaining the big question, “What is cash flow?” Cash flow defining is the amount of incoming and outgoing money in a business during a specific period. The higher your inflow, the greater your ability to invest while a more significant outflow of cash defines negative cash flow, and this may prove your losses.

The Importance of Cash Flow

Why is cash flow important? Well, here are some of the reasons why a cash flow statement is necessary for keeping your business afloat;

  • Business Startup: Entrepreneurs find it tedious to maintain a cash flow report at the startup of a business. This is due to the cost of getting things in motion. Credit is accrued in the effort to finance the business and get it to form a general outlook of negative cash flow to a stable positive cash flow level.
  • Business Peaks: For predictive purposes, especially for businesses that enjoy profits during peak seasons. Average businesses make monthly cash reports, unlike businesses operating during peak seasons. Therefore, a prediction of the expected payments would be cash inflow, and the expenses would determine the estimated cash outflow.
  • Estimating Profit: Accrual accounting helps calculate estimated cash profits despite not having cash at hand. This is different from the calculation of cash flow from the balance in the checking account. Accruing profits include recognizing revenue from invoices that haven’t been cleared. Eventually, the cash report shows a profit even though cash at hand is inadequate.
  • Liquidity of business: As stated, some companies deal with accruing profits. However, the accumulated cash may not be cashed during the business period. Despite sending invoice letters to clients. Here then the business is in danger of being unprofitable. Thus, a cash flow report will determine the fluidity of that business in case of bankruptcy.

Ways to Calculate and Track Your Cash Flow

The cash flow report is the formal way of managing the cash flow in your business. A statement of your accounts majorly your checking account can be calculated daily, weekly or monthly. Most of the money in your checking account is compared to the other business activities and deduced or added in the balance sheet.

1.     Compute a Spreadsheet

Create three columns. One for operating activity, for investing activity and the last for financing activity. Accounting statements from your financial institutions, including your bank, will be used to fill the columns.

2.     Calculate the Net Cash Flow from Operating Activity

The cash inflow will include the money from the daily delivery of goods and services, dividends, and interest. The cash outflow includes money used to purchase goods, remuneration of employees, duties and taxes, interest accrued to creditors and fines. The subtraction of cash outflow from the cash inflow gives you the net cash flow. Whether negative or positive, the total found is to be recorded under the ‘’operating activity’’ column.

3.     Calculate the Net Cash Flow from Financing Activity

The cash inflow is defined in two quarters, those of debt and that of equity. This classes the items and summation of the indebtedness as cash outflow and that of equity as cash inflow. Income from pools of pledges, bonds and stocks and other capital resources is balanced out with money spent. The cash outflow in the financing section will be a file that included money paid to reclaim equity in forms of stocks and bonds. Another would be payments of dividends to stockholders. The subtraction of cash outflow from the cash inflow gives you the net cash flow. Whether negative or positive, the number found is then recorded under the “financing activity” column.

4.     Calculate the Net Cash Flow from Investing Activity

These include income from resources in the investment on the bull and bear market. Cash inflow contains revenue from equity sales and asset-associated profits, including equipment and land capital.

The summation of cash outflow will be money from investing in equity interest, currency paid to buy capital resources such as equipment.

The subtraction of cash outflow from the cash inflow gives you the net cash flow. Whether negative or positive, the total number found is to be recorded under the “investing activity” column.

5.     Sum Up the Columns

Some simple addition of the three columns will reveal the daily, weekly, or monthly business cash flow. If the number turns out to be positive, then “thy cash flow is positive and the fruits many,” while a negative amount signifies little to significant losses in the business.

Examples of Cash Inflows and Outflows

The cash flow example of a business may be classed as below;

1.     Cash Flow from Operating Activity

Includes inflow from the heart of the businesses’ events that include the provision of services and crafting of new products for sale. Outflows are payments for acquiring goods from suppliers, compensating employees, interests on loans and taxes duly paid.

Cash outflow by these definitions is the money owed to various creditors, invoices not paid and may include money spent on unwise investments or advertising a new product that may not eventually profit the business.

2.     Cash Flow from Investing Activity

Includes inflow from selling capital resources, short-term investments, and investments made in other organizations. The cash outflow is the income lost in the purchases of the sales as mentioned above and investments.

3.     Cash Flow from Financing Activity

Includes inflow from situations of debt and shareholder equity. The outflow is majorly from paying principals on loans, dividends, and money spent to reclaim stocks.

To Improve Your Cash Flow, Some Ways Are Proved To Work

  • Always Track Your Cash Flow Trends.
  • Expect to trade unpredictably during your business cycle.
  • Be vigilant in keeping a good stock.
  • Stay away from impulse purchases and unnecessary restocking.

Now more than ever, you are prepared to restart the positive culture of tracking your small business cash flow. With the tips that have been shared above, we are confident you will begin to reap great profits and change the trajectory of your business cash flow for the better!

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