The Ultimate Cash Flow Management Guide for Entrepreneurs

What’s one of the top challenges in small business accounting? Cash flow management.

The average small business only has enough available cash to cover just under a month of expenses – much less than the three to six months most experts advise.

Understanding how cash flow works, how to make a cash flow statement, cash flow problems and how to manage your cash can save you the headache of constant budgeting problems. Here’s what you need to know to keep your company’s cash flow on target.

What is Cash Flow?

Cash flow is simply the movement of money into and out of your business. Having positive cash flow means you’re bringing more in than you’re paying out, which is ideal for any small business.

You want to avoid expenses exceeding available cash at all costs. This results in negative cash flow, and can tank your business.

Cash flow calculations include actual cash and “cash equivalents,” such as short-term bonds, commercial papers and marketable securities. The latter are considered part of cash flow because they’re liquid assets and can provide your business with a ready source of money if need be.

There are several different types of cash flow, and all are included in the general definition:

• Operating
• Financing
• Investing
• Free

What is operating cash flow? That’s the money you generate doing business. It doesn’t include investments or other outside sources of income – just whatever you get from running your company day to day.

When you subtract money spent on assets from operating cash flow, you get free cash flow. This is the amount accessible to investors and creditors; basically, it’s the money you don’t tie up in business activities.

Cash flow ratios show how money coming into your business relates to expenses, sales and debts. Knowing these ratios helps you determine your company’s viability. Specifically, if you’re  currently equipped to pay off short- and long-term debts.

What is a Cash Flow Statement, and Why is it Important?

To understand how these different aspects of cash flow affect your business, you need to make a cash flow statement. This financial document includes three sections:

• Operating activities – Money from operations, calculated with the operating cash flow formula of operating income plus non-cash expenses, minus the sum of tax obligations and changes in working capital
• Investing activities – Any activities outside of the normal course of business that affect cash flow, such as buying and selling equipment or property
• Financing activities – The investments you personally make in the business, plus money from other funding sources

Putting the numbers from these categories together gives you the total cash and cash equivalents for your business during a given period, minus expenses. If you find the math confusing or aren’t sure what to include, try using a cash flow calculator as a guide.

How often should you prepare a cash flow statement? Monthly statements make sense for several reasons. First, you get a concrete picture of how much you’re bringing in versus how much you’re spending. Second, it creates an ongoing record of your company’s financial health.

With this information on hand, it’s easier to see where you need better cash flow management strategies. It’s also important to have documentation when meeting with investors and lenders. They’ll look at the numbers in your cash flow statement when determining whether to extend funding to your company.

Note that cash flow isn’t the same as net income. Net income factors in sales made on credit. If the money from those sales hasn’t actually come in when you prepare your cash flow statement, it can’t be counted as available cash.

Your Cash Flow Plan for Better Money Management

In addition to creating cash flow statements, you should also perform a periodic cash flow analysis. Analyzing how money moves in and out of your business alerts you to potential problems. It can also help you pinpoint which areas of your operation these problems stem from. Catching these problems early – and taking steps to correct them – can prevent your business from getting caught in a cycle of negative cash flow.

A cash flow analysis considers:

• Accounts receivable, representing sales you’ve made but haven’t yet been paid for
• Accounts payable, which is the total amount you currently owe suppliers and vendors
• Shortfalls, or any liability that requires more cash than you have on hand

This gives a snapshot of your current cash flow status. You get less detail than with a full statement, but can still see whether your finances are on track.

When you have all the important numbers at your fingertips, it’s time to make cash flow your number one priority. Here are a few cash flow management tips to get you started:

• Figure out how many products or services you need to sell to break even (based on your profit margin)
• Pay close attention to the difference between profits and cash flow
• Maximize efficiency in your sales process
• Improve your invoicing strategies to decrease time between billing and payment
• Reduce liabilities through strategic expense and debt management

Finally, you always want to maintain a cash buffer. Preparing statements and analyzing them should ensure you have enough money available to keep your business running. However, you can’t predict every possible circumstance.

Using Business Funding to Preserve Working Capital

Like most other areas of business, there are always external factors. What could throw off your meticulous cash flow calculations?

• Crucial equipment malfunctions or breaks down
• You lose one or more key customers unexpectedly
• You’re presented with a lucrative business offer requiring an upfront investment
• A product launch generates more demand than expected

Seasonal businesses have even more variables. You may need to hire additional employees or stock up on inventory ahead of a busy season. Your e-commerce software could require updating to handle a higher volume of orders. Any of these scenarios could seriously impact your cash flow if you don’t have enough in reserve.

Despite the unknowns, it doesn’t hurt to prepare a cash flow model. Modeling involves using past cash flow information to forecast where your business will get money and plan how to spend what comes in. The formula is simple:

• Start with the cash you have on hand at the beginning of a period
• Subtract your total estimated outflows
• Use the result to calculate available cash at the end of the period

Ideally, you should end up with more than you started with. Of course, this won’t happen for every projection, just like it doesn’t happen on every cash flow statement. What you’re looking for is an upward trend over time to ensure your business remains viable and healthy.

If your cash flow statements, research and models all show you can’t bring in enough to cover expenses or don’t have a sufficient buffer to handle the unexpected, it’s time to consider small business funding.

Financing and loans can provide cash to put toward business operations or invest in growth. Spreading out payments over months or years allows you to incorporate the debt into your projections, keeping cash flow stable.

Find the Right Cash Flow Funding Option for Your Business

If your business needs extra money to cover expenses or boost cash flow, consider these loan and financing options from National Business Capital:

• Lines of credit
• Accounts receivable financing
• Equipment financing
• Short-term working capital loans

With low or no FICO requirements, National’s funding products are suitable for businesses in any financial situation. No matter what your cash flow looks like now, you may be eligible for funding to cover your short-term expenses and meet long-term goals.

Contact an advisor at National to learn more about your cash flow funding options and payment terms.