What Should a Cash Flow Statement Tell Me?
What is Cash Flow and How Does it Work?
One of the most difficult aspects to maintaining any business, but particularly small businesses, is the constant tug of war that happens between cash in and cash out.
The nuances of how to keep enough cash on hand to pay expenses and cover the ebb and flow of sales seems more artistic than scientific. For small business start-ups who have little to no experience, and even less in savings and cash on hand, managing cash-flow can be a confusing and challenging process. Early business growth brings advice from all sides often leaving entrepreneurs scratching their heads and ultimately guessing at how to keep it all flowing. Here’s a few of our most frequently asked questions with answers from our best small business advisors.
A: Yes, there are all kinds of online, easy-to-use, and even some free applications that can be a great way to help you keep tabs on cash flow. The Small Business Administration website has a Start with the Cash Flow Template from SCORE, which can be a great start for managing your company's incoming and outgoing finances.
Pulse is an online app dedicated to tracking cash flow. With its easy-to-use user interface, you'll be able to monitor cash flow, invoices, project future cash needs and even attach files to transactions to keep everything all neat and tidy.
If you're already using Quickbooks, take a look at the Cash Flow Forecast Report that is imbedded in the software's reporting features. It can provide you with a great deal of data on accounts receivable, accounts payable, bank accounts, and projected balances.
Additional key areas of cash flow include other key areas of your business such as the break-even point, inventory management, and handling overdue invoices. Let's review the basics.
Calculate Your Break-Even Point
At its most basic form, the break-even point can be defined as where expenses, total costs, and revenue, total sales, are equal for your business – in essence, the point where your cash flow levels off. To find your break-even, create a spreadsheet that lists all income from sales on a daily, weekly, monthly and yearly basis. Now put in all the of the expenses that must be paid out. After that deduction, you’ll find your breakeven point – when expenses and sales converge.
Breakeven Point = Fixed Costs / (Unit Selling Price – Unit Variable Costs)
Inventory Management
The key to most wholesale and retail businesses is in the inventory. Having too much inventory can lead to unsold products or locking up cash flow. On the flip side, too little inventory can lead to customers finding other competitors that sell similar products because they cannot purchase immediately from your website or store. If your lines of credit dry up, selling the inventory off is one way to increase cashflow, but if no one wants to buy the inventory you’re stuck holding onto it with little or no cash alternatives.
Overdue Invoices
The wait time for accounts receivables are increasing for small businesses. Slow to no collections are one of the most difficult areas for small business to take charge on. Try incentivizing clients to pay early or on time with a 10% discount and a percentage charge for late payments. If you have already implemented these recommendations and have yet to see a cash flow improvement, it may be time to consider a collection service. Collection agencies can take as much as 30 percent of the total amount due, so you’ll want to weigh your efforts to get the client to pay versus the cost of using collections. Offer extended credit terms or credit card payments as an option. If the client or company doesn’t have the funds to pay, the only other option is to take back the merchandise and return it to your inventory. Again, this can be a tedious process.
How can you speed up invoice payments? Invoice shortly after work is complete. Provide a detailed invoice including your work order, contract or other documentation, contact information, purchase order, Tax ID and account number. Send the invoices electronically for an even faster delivery. Reconsider your acceptable payment options such as Amazon Payments, PayPal, or other merchant services that can include credit cards.
A General Rule of Thumb
Business experts advise to always try to have a cash reserve of 3-6 months to cover the slower quarters.
While this is the gold standard, like many rules, it often isn’t realistic when it comes to small business start-ups and managing limited cash flow. If you find that your business is taking a dramatic turn and cash flow is severely restricted, don’t attempt to wait out the storm. Knowing where your business stands at all times is the best small business advice we give. If a business owner can see that cash flow is shifting, they can make a strategic move to correct the issue or seek temporary funding before the deficit becomes too damaging to the company.
