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Cash flow concept

By Eden Amirav

Poor cash flow management is the number one reason small businesses fail, causing 82% of business failures, according to a U.S. Bank study. How can you as a small business owner or manager mitigate this risk? How can you improve your company’s cash flow? First of all, you need to understand exactly what cash flow is (and isn’t).

According to Investopedia, ‘’Cash flow is the net amount of cash and cash-equivalents being transferred into and out of a business.” In a nutshell, it represents a business’s liquidity: the cash flowing in and out.

Cash flow is not revenue or profit. One source of a business’s cash flow is revenue, but there are many other sources, including, for example, the sale of business equipment. Another difference is cash flow is bidirectional in that it flows in and out and can become a negative number, while revenue is just an inflow.

Sources of business cash flow

Now that the definitions are out of the way, let’s explore how you can keep your business cash flow positive—in other words, keeping your cash inflow greater than the outflow. A good start is examining the sources of a business’s cash flow.

Cash from operations. This is cash generated from sales after paying off the costs of goods, any taxes due, loan interest, and all other relevant expenses. But cash from operations differs from profit or income because those measurements do not necessarily reflect cash in hand. For example, your income statement could show that your business made a profit, but if your customers don’t pay on time, your business could actually run out of cash after you pay your suppliers.

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Cash from investors. Any cash earned through investing falls under this category, including cash generated through the sale of business assets, e.g., equipment, property, or securities. Conversely, any cash used to buy assets, such as property and equipment, is a cash outflow. Intangible assets also fall under this category, such as cash used to purchase intellectual property or to build your brand.

Cash from finances. This includes any cash generated through a business loan or credit lines. The sale of company stock or the sale of bonds to investors also counts as cash from finances. When you pay off any debts, this is also cash outflow from financing.

Even though these are the typical cash sources, they can differ from business to business based on many factors, including business age and type of business. For example, a new business would typically generate less cash from operations and more from finances through loans or investors.

How to monitor your business cash flow

You can’t improve something that you don’t understand, so it’s essential to monitor and measure your business’s cash flow. This doesn’t have to be time consuming if you use one of the many tools available, such as QuickBooks or FreshBooks. You can also hire an accountant to help you.

To monitor your business’s cash flow on your own, follow these tips:

1. Look at your current available cash from the following sources:

  • Investments in your business
  • Loans
  • Your business bank account balance
  • Cash from sales
  • Cash from the sale of equipment/excess inventory
  • Any other cash generated
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2. Calculate your monthly expenses:

  • Working capital
  • Rent/mortgage
  • Marketing costs
  • Salaries (including yours)
  • Inventory costs
  • Taxes owed
  • Cost of utilities
  • Loan repayments
  • Any other expenses

Aside from monitoring your cash flow, you can also make cash flow predictions, known as cash flow forecasting.

What is a cash flow forecast?

Much like you can monitor your cash flow on an ongoing basis, you can also create a cash flow forecast or projection to ensure you don’t run dry. We recommend forecasting 12 months ahead. More than that may be counterproductive as there are too many unknowns and changes that can happen in a business over time.



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