Cash flow is the lifeblood of a business. It’s how you pay your bills, buy supplies, and invest in new equipment. If you want to be successful in your small business, then it's important that you understand how cash flow works and how to manage it effectively. Tracking your cash flow helps you make better decisions, save money and plan for the future.
In this article we'll discuss what cash flow is, the different types of cash flow that can affect your company's finances and how to manage them for greater profits and fewer headaches.
What is cash flow?
When you're running a business, it's important to keep track of your cash flow. Cash flow is the movement of money in and out of an organization over time. It reflects the difference between a company's operating income and expenses for a period like a quarter or year. Cash flow can be used to measure liquidity—the ability to meet current obligations with available assets and services—and is closely related to profitability because it measures whether cash received exceeds costs paid out during an accounting period.
How to calculate cash flow
The concept of cash flow is simple, it's the difference between your cash inflow and cash outflow, or the amount of money that goes in and out of your business over a given period. Your cash flow statement tells you the amount of cash your business has available at the end of a given period – usually a month, quarter, or year.
When calculating cash flow, you'll want to take into account what you have coming in (revenue) and what you're paying out (expenses). You can then compare these two numbers to determine whether there's enough money coming in to cover all expenses for that period.
What are the different types of cash flow?
There are three main types of cash flow: operating, investing, and financing.
Operating cash flow is the money that comes in from sales and goes out for expenses and taxes. You usually have to pay for things like electricity, staff wages, and rent before you can make profits.
Investing cash flow is what you use to buy assets such as equipment or property, things that will generate income in the future. Investing helps grow your business so that it can make more money later on.
Financing cash flow refers to how much debt a company has, the amount owed by a company (and its owners) over time based on past borrowing activity
What is operating cash flow?
Operating cash flow is a measurement of the cash being generated by a business. It is an important metric to track because it shows how much money you have available to pay off debts, reinvest in the business, and pay dividends.
You can calculate operating cash flow by subtracting your net income from your capital expenditures.
Net Income (operating income) - Capital Expenditure = Operating Cash Flow
What is investing cash flow?
Investing cash flow is the money you use to grow your business. It's money that you don't plan on using for a few months, or even years, and it can be used for many different purposes:
- Purchasing new equipment or tools
- Hiring more employees
- Making other business-related purchases
What is financing cash flow?
Financing cash flow is simply the funds you need to borrow or raise. You might use financing cash flow to
- buy equipment
- expand your business
- or cover unexpected costs
5 Tips for managing your cash flow
Managing cash flow is one of the most important aspects of running a successful business. But it's not an area that many business owners spend much time on – in fact, it's often seen as less important than other aspects like sales and marketing.
This can be a costly mistake, because poor cash flow management can lead to late payments from suppliers or customers, which ultimately affects your bottom line in a big way. Below are some tips for managing cash flow effectively.
1. Measure your cash flow regularly.
As a business owner, it’s important to keep a close eye on your cash flow. This can help you make better decisions and avoid costly mistakes that could otherwise put your business at risk.
The purpose of measuring cash flow regularly is so that you can look at trends over time; these trends will tell you whether or not things are improving or getting worse from quarter-to-quarter, monthly, or yearly.
2. Speed up your collection process
A good collection process can help you generate cash. Collect payments as soon as possible. If you're selling a product or service, get your customers to pay before they receive the goods or service.
3. Limit your spending to the bare minimum
Keep your costs down. Think about whether you really need a more expensive office space if there are cheaper alternatives available that could save money in rent/mortgage payments, utilities bills and other overhead fees.
4. Offer discounts for early payments
If you can't afford to offer a discount on your services, consider offering discounts for early payment. This is a great way to get customers to pay their invoices quickly, and can be an effective way to save money on the cost of credit card processing or rent.
5. Review your prices regularly
Reviewing your prices regularly is a good practice to get into. Make sure you do it at least once a year, and try to time it so that the review takes place after you've had time to assess your costs.
You can make better financial decisions by tracking the inflow and outflow of money
It’s important for small business owners to know how much money is coming in and going out of their business. Without this information, it’s hard to make good financial decisions. For example, you may invest too much money into your business without knowing where the cash is going or whether you have enough operating capital.
By tracking the inflow and outflow of money, you can make better financial decisions in your small business. This will ultimately save time by avoiding unnecessary expenses or poor investment choices that could affect future growth opportunities down the road.
Club Capital Is Here To Help
For the past 5 years, Club Capital has helped insurance agents better manage their agency's finances through best-in-class monthly accounting, CFO, and tax services. Schedule a demo today!
