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What is Cash Flow and Why is it Important?

  • Financing|
Published: 05/15/2019

If you’re part of, or looking to enter, the business world, you’ve probably  heard the term cash flow thrown around. But you might be wondering, what is cash flow, and how is it relevant to you?

Cash flow is your business’s stream of money coming in, minus the money going out. It directly impacts your company’s bottom line.

Continue reading to learn how to create a cash flow statement for your business & what to do when cash flow problems arise.

How to Create a Cash Flow Statement

A cash flow statement is a document that summarizes the amount of money entering and leaving a business. To figure out your overall cash flow statement, you’ll need to combine three components: operational, investing, and financing expenditures.

Calculating the operational portion is simple; if you make X amount from sales and spend Y amount on rent, equipment, marketing, etc., the difference is your operational cash flow for the month. You can choose to measure this for any time frame, but measuring your monthly cash flow is the most common.

[Sales] – [Operating Costs] = Operational Cash Flow

For the investing portion, calculate your net increase or decrease by comparing how much money you earn and spend on investing. Include investments like fixed assets (such as property and equipment) and money you reinvest into your business to determine your net increase or decrease.

[Investment Income] – [Additional Investments] = Investment Cash Flow

To generate your cash flow statement according to your financing activities, account for credit extended to customers, debts or loans owed, dividends to return to investors, and other expenses not related to your operations or investments.

[Loan or Capital Contribution Income] – [Debts Paid] = Financing Cash Flow

When combined, these components create your overall cash flow statement. If you make more money than you spend, your cash flow is positive; but if you spend more than you make, then your cash flow is negative. And if the two are equal, then your cash flow is considered “net zero.”

[Operational Cash Flow] + [Investment Cash Flow] + [Financing Cash Flow] + [Beginning Cash Balance] = Ending Cash Balance

It is important to note the difference between cash flow vs. balance sheet. Your balance sheet is a financial statement that shows your company’s assets, liabilities, and shareholder equity.

Your cash flow is the amount of cash—and cash-equivalents—entering and leaving your business; your goal is to receive more money than you spend. A positive cash balance after paying your employees and your expenses is not just your profit; it’s your opportunity to grow your business even further.

How to Address Cash Flow Problems

Unfortunately, cash flow issues arise from time to time, and you might experience a negative cash flow. However, this does not necessarily equate to a loss unless your cash balance—the funds you have readily available—is negative as well. Having a negative cash flow isn’t the end of the world; sometimes, it is an unavoidable part of doing business. However, if you are continuously experiencing negative cash flow, then this might be due to poor cash flow management and signal a need to reevaluate your business strategies.

External factors can play a role as well. The overall economic climate is a significant contributor to cash flow—if your customers are doing well, then they can afford to do business with you. Seasonality is another influencer; consumers might demand a product or service during one time of year rather than another (such as heating system repairs in winter).

However, if you find yourself having a consistently negative cash flow, there are multiple options you can explore to keep your business afloat until you can make the necessary internal changes to your business. The first step you should take is assess your business operations and identify what is necessary vs, unnecessary. Minimize your unnecessary expenditures and renegotiate contracts with vendors to reduce your cash outflow. It might also be worth it for you to automate manual processes; this will free up time that is otherwise spent manually completing tasks and will allow you to put your time and energy toward reaching new customers and cultivating relationships with existing clients.

Something else you can do is open a business line of credit—similar to a credit card—where you only pay interest on your outstanding balance instead of your overall credit limit. Or if necessary, you can also apply for a short-term business loan. Once approved, these loans are transferred to your account much faster than a traditional business loan. With a loan, you have money on hand to pay necessary expenses—such as payroll and rent—while your profits are temporarily low. Financing options also help you reinvest in your business. It provides you an opportunity to design a new marketing strategy, update your technology, move to a new location, or peruse other activities to help generate new revenue.

Should you need a loan, one place you can turn to is Currency. We offer hassle-free financing options to give your business a boost, such as loans up to $500K and multiple funding plans. You can also open a line of credit with us and apply for equipment financing if you decide one of those solutions is right for you.

But remember, before you apply for any financing option, to take a look at your business and see what you can improve. Do you accept online payments, or are you still waiting for checks in the mail? Are there contracts you can renegotiate, or ways to incentivize customers to pay their invoices on time? It is important to ask yourself these questions because borrowing when you don’t need to can make your cash flow situation worse. Scrutinize your business operations to help you determine what’s holding you and your cash flow back.

Cash Flow Analysis: Tips to Prevent Cash Flow Problems

Of course, exercising good cash flow management practices from the start will help prevent issues from arising. One step you can take to improve your cash flow management is to offer recurring billing—a time-saving tool that Currency can set up for your business. Instead of manually invoicing customers every month, using an automated system encourages them to make timely payments. It also frees up your time to focus on other aspects of your business, such as new marketing ideas or improving your customer experience.

The biggest benefit of recurring billing is it makes your cash flow more predictable. Having too many pending payments rather than completed payments makes budgeting difficult, which can set back your plans to reinvest in your business and pay existing costs. Automating payments—and accepting multiple types of payment, such as credit cards and ACH transfers–gives both you and your customers a sense of reliability and familiarity at the check-out window.

Implementing effective cash flow management strategies, such as recurring billing and providing a variety of payment methods, are critical to ensuring your cash flow is positive as often as possible. And whether you are trying to improve your cash flow management process or recover from negative cash flow, Currency can help you with all of it.

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