Running a small business is hard work. One aspect of maintaining your company’s success is staying on top of your cash flow. But what exactly is cash flow and how can small business owners maintain a healthy one? Here’s a primer courtesy of WIFIN, a non-profit organization committed to bridging the generational gap for women in the industry.
As Cash Analytics describes, cash flow is the movement of funds into and out of a business. Tracked weekly, monthly, or quarterly, there are two main classifications of cash flow:
Positive cash flow is when the cash coming into your business is more than the cash flowing out of it. It basically means your income from sales, accounts receivable, and other sources is higher than your expenses.
Negative cash flow is the bookend to positive cash flow. It means your business’s expenses outweigh the amount of money coming into the company.
The terms “cash flow” and “profit and loss” may seem interchangeable but there are specific differences. At its core, income and profit are calculated using accrual accounting principles. This means expenditures are ironed out and revenues are linked to when products or services were delivered. Due to the matching behavior and revenue recognition, a business’s net income can be wildly different from its cash flow.
Figuring out your cash flow is one of the best ways to snapshot the health of your business. Are you typically making more than you’re spending? This is good. Is your cash flow edging into the negative? This indicates problems.
Here are a few tips to help you maintain a positive cash flow.
Software is the backbone of business processes. Everything from accounting to payroll ought to be automated where possible with effective software. In particular, implementing a payroll system can help you maintain a healthy cash flow by monitoring your expenditures. Also, one simple thing you can do that’s great in terms of advertising is using a free Instagram post generator for eye-catching promotions.
Cash is king so it’s essential that you have a reserve to help you weather any financial storms. ConnectWise recommends that you ensure your day-to-day practices include strategies for building a cash reserve. The longevity of your business will thank you.
Accurate, reliable bookkeeping is key when it comes to maintaining a positive cash flow. Without accurate data, any cash flow strategies are going to be a shot in the dark. Going in blind like this is one of the worst things you can do for your company.
Positive cash flow relies on effective invoicing. You must maintain a regular invoicing schedule and make sure you follow up on any late payments as quickly as possible.
Keeping your personal and business finances separate is key when it comes to maintaining a healthy cash flow. When you muddy the waters by combining them, you also muddy the insight you have into your business’s cash flow behaviours.
As a small business owner, it’s essential that you maintain a healthy cash flow. Now you know a little more about doing just that — but with these tips, you’ll be ready to expand in no time!
Author: Elena Stewart, USA
WIFIN Insights 2021