Small Businesses & Cash Flow Management
May 14, 2015
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 that you spend to buy inventory or business equipment is cash that is an asset on your balance sheet, but that 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 waiting to be paid. You cannot spend profit. A profit on the income statement does not always indicate financial health unless the company also has a positive cash flow that correlate 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 – The cash generated from the day-to-day operations of the business including the sales of products, the collection of accounts receivable, and the payments of vendors.
Investing Cash Flow – The cash that is used to purchase equipment.
Financing cash flow – The cash from outside normal business operations, 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? Through better accounts receivable collection or from a bank in the form of a loan?
Adapting to cash flow management could mean the difference the success or failure of a business.William Vaughan Company has the skills and expertise to help our clients with all aspects of their business management. Contact us today to find out more about how cash flow management can help your business.
By: Christine Schultz, Accountant