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What Is Cash Flow & Why Is It Important For Small Businesses?

What Is Cash Flow & Why Is It Important For Small Businesses?

What is cash flow?

Cash flow is known as the movement of money in and out of your business. Treat the "cash" in your cash flow as real physical money and any cash equivalent. In other words, it is the amount of cash (currency) that is generated or consumed during a given period.


What are your liquid assets?

Cash or cash equivalents are liquid assets. It is poured from one "container" into another without resistance. Cash and cash equivalents can be used to make purchases at any time. Cash accounts, checking and savings accounts, and money market accounts are part of your cash flow.


What are your non-illiquid assets?

Non-Liquid assets have value but are not easily accessible. Money owed to you by a supplier or customer is not part of your cash flow. Also, physical assets, such as real estate or a tractor, are not part of your cash flow. Credits aren't spent until the customer pays you. You must sell your physical assets to convert them into cash.

Items such as vehicles and real estate are not illiquid and may involve complicated sales processes. Properties have a custodial process, and vehicles require registration and transfer of title.


How is cash flow calculated?

Calculate the net cash flow for a given period. For example, calculate a month's cash flow as you would a bank account.

How much money was invested in the business in a month, and how much did it cost? Obtain cash flow by subtracting the end-of-month cash balance from the opening cash balance for the month.

If you look at a month's cash flow, is the number in your favor? Do you still have money at the end of the month? If so, you have positive cash flow. If you have a negative balance, then you have negative cash flow.


If your cash flow is negative, look for ways to improve your cash flow.


What affects cash flow?

Some businesses have limited cash flow because they spend all the money they earn. They can spend most of their bills. Large corporations may tie their money to real estate or hold large stocks.

Companies may also have significant debt at some point in the distant future.


How small business operations are affected

For example, a company is committed to designing a public park. The town hall will pay for the project once it is finished. Depending on other contractors and time, the project will take six to ten months.

The company expects to receive $50,000 from the city by the end of the year. However, they may not have the resources to repair their lawnmower by then.

Another company focuses on a seasonal market. They are a mail-order company that manufactures English sweets. The pastry chef produces thousands of poundss of sweets that sell between October and January.

In mid-January, they had a large cash flow. However, they may have to pay off debts accumulated during the quieter months. They may also need to budget carefully to survive the upcoming holiday season.

The gardening business and the confectionery business have low cash flow. They are not constantly liquid.


Why do you need a positive cash flow?

A business with a positive cash flow can react to opportunities. Confectioners can react to falling sugar prices and can stock up on sugar. The landscaping company may purchase additional equipment when it goes on sale.

A business with positive cash flow is better able to respond to opportunities and challenges. They can immediately face a crisis and pay what they need. They can also invest in the business and pay off your debts.


Cash flow matters to banks and investors

The ability to react to threats and opportunities inspires confidence in investors and credit managers. It also shows that the company is stable and more likely to repay loans or pay dividends.


Steps to improve cash flow:

  • Start with a solid accounting system: A serious company documents its strengths and weaknesses. It can let you know at any time about the state of your assets and debts. Basic accounting only requires pen and paper or a dynamic spreadsheet such as Microsoft Excel. There are also many complex financial models and specific accounting software.

  • Balance cash on hand with stock on hand: It's tempting to try to stock everything a customer might need. On the other hand, flexibility is also needed. Don't tie up all your money in cash goods.

  • Sell old inventory: Once you have determined that you are not selling at full price, sell the items at a loss. Its value is unlikely to increase. Better turn it into money.

  • If you provide services, manage your purchase orders and billing: Instead of accepting a one-time payment at the end of a project, consider an essential payment schedule. Whenever possible, start with a deposit.

  • If you supply goods to other businesses, request payment of your invoices within 30-90 days. Don't extend your payment options by a quarter.

  • Offer your services as monthly subscriptions: Get customers and clients to pay you on a regular monthly schedule.

  • Extend your business model beyond seasonal highs: A confectionery business can attract many gifts and celebrations throughout the year. Consider how to expand your business model.

  • Stick to your budget and your cash budget: Saving money is not interesting. Discover that money in the bank can be your most valuable asset.


Everything you need to know about cash flow

There are many ways to get money out of your business. Here are some best practices to help you better manage your money:


Salary Management

Of all the payments you make as a small business owner, one of the most important will be to the people who help you keep your doors open every day: your employees. Manage your salaries well, keep your employees happy and avoid problems with the law by following these tips:

  • Write down your payroll dates: It's easier to make payments when you know when your payroll is due. If you know, all you have to do is have enough cash on hand as the date approaches.

  • Pay electronically and keep clean records: Automating payroll can save you time. Be sure to correctly classify each employee (as a W-2 or 1099 worker) so that your wages reflect the correct deductions and taxes.

  • Payroll tools allow you to quickly and accurately manage salaries for contractors and W-2 employees. They also keep track of each employee's salaries, which are useful during tax season and for other purposes as they arise.


Paying Contractors

You can pay contractors by the hour or by the project. Whatever you decide, make sure it's clearly specified in the contract, along with other important information such as project duration, payment frequency, deadlines, and penalties for late work.

In the United States, you generally do not withhold federal or state income tax from your contractors; they will be responsible for paying them themselves.


Paying Taxes

As an entrepreneur, there is no way to avoid taxes. You have to pay them, and you will have to pay them quarterly in most cases.

Saving money will allow you to avoid penalties or fines from the Internal Revenue Service. You can get an idea of what you are expected to pay each quarter (and what you should save each month) by looking at IRS Form 1040-ES.


Payment of Bills

For accounts, know who you owe and when. You have a summary of these basics and review it regularly.

You should also set aside time regularly to review your Accounts Payable and Active Accounts reports. Plan ahead and weigh up your expenses to your estimated income. This will not only help you stay up to date with your bills and invoices but will also help you set stronger and more realistic financial goals for your small business.

Once you understand how to manage the money leaving your business, you will have a strong cash flow and be able to maximize the use you make of your financial situation.


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