Managing cash flow is a critical skill that every business owner needs to learn if they want to be financially successful long term. Cash flow is important for a small business because it shows how much money is actually coming in and going out of the business. If your cash flow is in the green, you'll know that you're making more money than you're spending. You'll also have enough cash on hand to pay your employees, buy and upgrade equipment, pay back loans, and take care of other important business needs. If your cash flow is in the red, you might not be able to pay your staff and suppliers, cover your monthly rent, or other important business costs. So how do you manage cash flow effectively?
Figuring out your cash flow
There are three key formulas that can help you figure out cash flow: free cash flow formula, operating cash flow formula and cash flow forecast. Each method is used for something different. Free cash flow is the amount of money that can be shared among all the company stakeholders. It tells you how much money you have to put back into the business; for things like buying equipment, expanding your store, or buying a new product for your business. The operating cash flow method gives you a quick look at how your business spends and earns money every day. The cash flow forecast shows you how much money you will have coming in over the next month, quarter, or year. All three of these methods are necessary to help you understand how much money is coming in and going out of your business at any given time.
Trying to predict cash flow
Part of making a budget is figuring out when money will be paid and spent. To predict cash flow, look at the numbers from the year before as a starting point for the next year. Then, make changes to account for things that you know will change, like new pricing, more customers and sources of funds. As the year goes on, you should update your cash flow forecasts to show how expenses and profits have changed. By comparing budgeted cash flows to real deposits and spend, you can figure out how much cash you will have in the future.
You could also add the money you already have to the money you expect to receive. Then, add up how much of that money you plan on spending. Even the most successful businesses find that their predictions change often, which is why it's important to keep an eye on cash flow.
Preparing a cash flow statement
Cash flow statements show you how well your business is doing. They show that your business is in good shape and can keep going no matter what. On cash flow statements, you can find a lot of in-depth information. These include:
Cash from running a business:
This is how much money is coming into your business. This could be a problem if this number is less than net income or is negative.
Cash from investments:
This includes money your business has spent on itself and its goods.
Cash from financing activities:
Here you can see how much money your business is spending to pay off its debts.
Net change in cash:
This is how much money your business makes or loses because of how it invests and finances itself.
The beginning and final balances of net cash can be shown. Adding the net change in cash to the starting balance gives the ending balance. The final balance tells you how much money you have.
The bottom line
Cash flow is important for business growth. If you can predict cash flow accurately, you will be able to steer your business in the right direction. Proper cash flow will also help you get ahead of the market. You’ll be able to understand your customer, supplier and contractor revenue cycles. Every business has busy and slow times. Knowing what your costs will be for your employees, new equipment, and other needs will go a long way toward making sure your business is ready for any bumps in the road. To fund your business and boost your cash flow in the next 48 hours, contact Merchant Capital today.