You're a careful budgeter and a diligent saver. So surely you'll be a financially savvy small business owner too, right? Wrong. While business and personal finances have some overlap — they both require tracking income and expenses and assessing overall financial health — managing a small business's finances is very different from personal budgeting.
Unless you're living paycheck to paycheck, cash flow isn't a major concern. For small businesses, on the other hand, cash flow is everything as it’s the leading cause of business failure. Even if a business is going well, a company won't survive if it can't pay its bills. Summit Tax Solutions provides a quick guide for curious small business owners.
What is cash flow?
Cash flow is the movement of money in and out of a business over a period of time, usually monthly. Cash flow statements show the amount of liquid cash a business has at its disposal. If you have more money coming in than going out, you're cash-flow positive. If you're spending more than you earn, you have negative cash flow.
Cash flow is different from profit, which is what remains after all expenses are paid. It's possible to be profitable yet cash-flow negative during times of growth. Likewise, a business may be cash-flow positive due to borrowing or other capital infusions yet unprofitable overall.
What does healthy cash flow look like?
No matter which way it swings, cash flow isn't inherently good or bad — it simply must be managed. A business that consistently outspends its earnings isn't sustainable, nor is a business sustaining its cash flow with credit or by selling off assets.
In general, companies should strive to maintain positive cash flow while adequately reinvesting in the business. Your cash flow is healthy if:
You consistently generate more cash than you spend.
Cash flow comes primarily from operating activities, not financing.
Accounts receivable turnover is high and customers pay on time.
Signs of cash flow trouble include:
A trend of negative cash flow.
Depleted cash reserves.
Late or non-payments.
Growing short-term debt.
Inventory piling up.
The easiest way to monitor cash flow
The biggest cash flow mistake small businesses make is not monitoring it. It's true that it takes money to make money, but if you can't make payroll or pay your bills on time, you won't be earning money for long.
Monitoring your business's cash flow isn't a complicated endeavor — or at least, it's not, if you use the right tools. While manual bookkeeping requires setting aside hours for carefully logging transactions, automated tools let you skip straight to analyzing the big picture.
Automated business bookkeeping requires an online bank account and cloud-based accounting, payment, and payroll tools that integrate with one another. Together, these tools sync and centralize your business's transactions in real-time so it's easy to generate cash flow statements and other financial reports.
Since opening a small business bank account is one of the first things you'll do when starting a business, it's important to think about your accounting strategy early on. In addition to online access and a full suite of integrations, look for a business bank account with instant deposits and free transfers so your cash never gets held up. It's also smart to use accrual accounting from the onset. Not only does the accrual method offer the truest representation of a business's cash flow, but it's also the method preferred by accounting pros.
More tips on maintaining a healthy cash flow
Is your company’s cash flow not as healthy as you’d prefer? Use these tips to improve cash flow and strengthen your small business’s finances.
Perform credit checks on new customers.
Consider cash flow when setting payment terms and pay periods.
Invoice customers promptly and automate payment reminders.
Accept credit cards and electronic payments to streamline payments.
Take advantage of payment discounts.
Improve forecasting to prevent overstock and stockouts.
Avoid underpricing your products or services.
Cash flow is the lifeblood of any small business, yet far too many small business owners fail to keep an eye on this important metric. Whether you’re just starting your business or wondering why your company can’t seem to get ahead, make sure cash flow management is a central part of your financial strategy.
Summit Tax Solutions provides a number of different tax services for small businesses. Contact us now at (435) 214-0123 to learn how we can assist you and your business.