The Cash Flow Guide for Small Business Owners
82% of businesses fail because of their cash flow. This shouldn’t be so. We want to help you stay out of this statistic and thrive as a small business owner. There are very simple, practical ways you can improve your cash flow. Good bookkeeping is the foundation. Let’s dive in!
What is cash flow?
Cash flow is how money goes in and out of your business over a certain period of time. Cash spent is a cash outflow from your business. Cash earned is a cash inflow from your business.
It demonstrates an organization’s ability to operate in the short and long term, based on how much cash is flowing into and out of the business.
What are the types of cash flow on a statement?
A cash flow statement (that either you create or your bookkeeper provides you) separates your cash flow into into three categories: operating, investing, and financing.
Operating Cash Flow
Operating cash flow is core business activities, generated once the company delivers its regular goods or services, and includes both revenue and expenses. Examples include customer payments, payroll, and inventory purchases. Operating cash flow = Net income + non-cash items + working capital changes.
Investing Cash Flow
Investing cash flow is fixed asset activities of purchasing or selling—think physical property, such as real estate or vehicles, and non-physical property—using free cash, not debt. Fixed assets are assets you plan to use for a long time. Buying equipment is an investing cash outflow. Selling some of your fixed assets would be an inflow.
Financing Cash Flow
Financing cash flow is debt and equity activities—cash flow that you pay or receive from lenders, investors, or other creditors.
Based on the cash flow statement, you can see how much cash different types of activities generate, then make educated business decisions based on your real life data from your financial statements.
Remember - cash flow is different from profit, which is why a cash flow statement is often interpreted together with a balance sheet and income statement.
Positive and negative cash flow
Positive cash flow indicates that a company has more money flowing into the business than out of it over a specified period. This is an ideal situation to be in because positive cash flow allows you to:
Reinvest in your company and its shareholders
Settle debt payments
Plan expansions with financial clarity
Pay bills on time
Buy equipment and inventory
Avoid cash crunches
Identify opportunities to increase your bottom line
Positive cash flow does not necessarily translate to profit, however. Your business can be profitable without being cash flow-positive, and you can have positive cash flow without actually making a profit.
Having negative cash flow means your cash outflow is higher than your cash inflow during a period, but it doesn’t necessarily mean profit is lost. Instead, negative cash flow may be caused by expenditure and income mismatch, which should be addressed as soon as possible.
Ways to improve your cash flow
Negotiate the time period of your payment terms with your vendors.
Instead of having invoices due at delivery, negotiate with your vendors so you can pay 30 to 60 days from receipt.
Collect cash sooner
Get a percentage of a contract or large order upfront. If your business invoices customers, you have to wait to get your money; encourage them to pay sooner by offering discounts to those that pay before the due date.
Set up automatic reminders to follow up on unpaid invoices
Use your aging report each month to see who’s payments are still outstanding.
Pricing strategies
Use dynamic pricing strategies based on demand and competition. Offer product bundles at a discounted rate to increase the perceived value and boost sales (more units sold to one person as opposed to multiple, decreases shipping costs, too).
Manage expenses
Do an audit of your operating expenses and trim unnecessary expenses like subscriptions you forgot about, etc. Know the difference between an ROI (Return on Investment) and an unnecessary expense. Based on ROI, outsource where it’s best, like bookkeeping and tax filing, so you can focus more on your business.
Improve inventory management
If you’re a retailer, use inventory management systems to keep track of stock levels and avoid overstocking. Remember inventory that isn’t sold yet is cash on hangers - MOVE IT. Get creative and get it out.
Put your unused cash to work
Invest and put it in a high-yield savings account.
Hire a bookkeeper
This cash flow fix applies to every business - not just the ones struggling with cash flow. Knowing your numbers is power! Cash flow statements are one of your most important financial statements offering valuable insight into the health of your business. By learning how to read a cash flow statement and your other financial reports, you can make smart business decisions to grow your business and build a legacy.
We are in this together. You don’t have to do it all alone - and remember, do what you do best and outsource the rest. To support small business owners, HarQuin offers free monthly “Understanding Your Reports” training and a free bookkeeping estimate.