The entrepreneurial spirit that compels people to start their own business does not necessarily translate into them being good business managers and this can lead to a stumbling block for many small business owners.
One of the most troubling aspects of running a small business can be learning how to manage cash flow. Understanding the basics of cash flow can help owners plan for large and small upcoming events in their business.
Cash is what you have at any given time to meet your daily expenses. The cash spent to buy inventory or business equipment is an asset on your balance sheet, but cannot be easily converted to pay monthly expenses. Profit on an income statement does not equate to cash in the bank if you have accounts receivables which require payment. You can’t spend profit. A profit on the income statement does not always indicate financial health unless the company also has a positive cash flow that correlates to those profits.
Many business owners use a cash flow statement to help them understand the movement of cash in their business. A cash flow statement will tell them the sources and uses of their cash.
A typical statement has three areas:
- Operating cash flow – is the cash generated from the day-to-day operations of the business. For example, the sale of products, the collection of accounts receivable and payments from vendors.
- Investing cash flow – the cash that is used to purchase equipment.
- Financing cash flow – cash from outside normal business operations. For example, money from lenders or shareholders. A new loan or the repayment of a loan creates the cash inflow or outflow.
Good cash flow management requires the business owner to be forward thinking – when and how will cash be needed. How will I acquire the cash needed- thru better accounts receivable collection or from a bank in the form of a loan?
Acquiring the skills necessary to become adept at cash flow management could mean the difference between business success and business failure.
William Vaughan Company has the skill and expertise to help our clients with all aspects of their business management and cash flow is just a small part of overall good business management.
By: Chris Schultz. Accountant