Welcome to the wonderful world of managing cash flow! Yes, we know – it’s exciting to see how much your business is making, but it can be intimidating to track it. Stick with us, though. We promise learning how to effectively manage your cash flow will be worth your time – and your money.
No matter the industry – SaaS, startup, ecommerce, crypto, you name it – understanding how to manage cash flow is one of the most important parts of running a successful business.
Stick around to learn more about why managing cash flow is so critical to your business succeeding, some best practices for managing it correctly, and what to do if you need to get your cash flow back on the right track.
What is cash flow, and how can I manage it effectively?
Simply put, cash flow is the movement of money in and out of your business account over a specific time period.
A positive cash flow means you’re earning more than you’re spending, which is good news for your business. You can pay your bills, invest in your biz, and have some extra cash left over.
A negative cash flow is a red flag that you’re spending more than you’re earning. This can make it tough to pay bills, meet payroll, and focus on growing your biz.
That’s where cash flow management comes in! At its core, managing cash flow is all about understanding where your money is coming from and where it’s going.
It’s about knowing how much cash you have on hand, how much you owe, and how much you can afford to spend. It’s about making smart financial decisions that keep a positive cash flow. Or as accountants say, in the black, and out of the red.
So, how can you start managing cash flow effectively? A cash flow statement is a great place to start. More on that in the next section!
What is the purpose of a cash flow statement, and why is it important?
You know all the ways we said managing cash flow helps your biz? Well, that management is done using a financial statement called the cash flow statement.
A cash flow statement is one of three essential financial statements, along with the income statement and balance sheet. It measures liquidity and profitability, serving as a reliable indicator of your business’s financial health.
Think of a cash flow statement like a financial report card for your business. How well is your business generating cash this month? Does it generate enough to support operations and growth right now?
This statement will “grade” your business’s financial performance for a specific time period. And timing is everything! You need to know when you’ll have cash in your account for business expenses and opportunities.
So, let’s look at an example of how a cash flow statement can help your biz.
How cash flow works: An example
Say you’re an ecommerce retailer that sells handmade jewelry. You just landed an order from a boutique that’s going to bring in $50,000 in revenue.
You purchase all of the necessary supplies for the order, which cost $30,000. You pay your rent, utilities, and other miscellaneous expenses, which total $15,000 this month.
At first glance, it seems like you’re in good shape. You have $50,000 cash coming in and $45,000 cash going out, so you’ll net $5,000 cash in your bank account. Right?
Not necessarily. The problem is that the $50,000 from the boutique won’t be in your bank account until next month, and your expenses are due now.
So while you’re technically profiting, you don’t have the cash on hand from this sale to cover your expenses. This is a classic cash flow problem.
That’s where the cash flow statement comes in!
By reviewing your cash flow statement, you can see when you have a negative cash flow for the month and need to find solutions. Maybe you decide to negotiate payment terms with your suppliers, or look for ways to increase your revenue in the short term.
Plus, using a cash flow statement on a consistent basis will help you plan for future expenses and make sure you have enough cash on hand to cover them.
How to read cash flow statements
Now that we’ve covered the importance of a cash flow statement, let’s dive into how to read one!
Reading a cash flow statement
Typically, there are three sections on a cash flow statement: operating activities, investing activities, and financing activities.
Operating activities is often considered the most important part. It shows your operating cash flow – AKA, how much cash is generated from your business’s core products or services. If your business doesn’t have a positive cash flow in this area, you’re going to need to make some big changes.
Investing activities shows any money that you’ve spent on big purchases, like fixed assets, equipment, buildings, stocks, or other investments.
It also can include the inflow of cash from certain activities, such as the sale of fixed assets and investment securities, and the collection of loans and insurance proceeds. These are categories on the cash flow statement rather than the income statement since they directly affect your business’s liquidity.
Financing activities shows any money you’ve paid out to investors or borrowed, such as a loan.
If you’re stuck on how to read a cash flow statement, reach out to our team of experts! We can help you identify underperforming areas, key trends in your financials, and provide you with personalized, strategic advice for your business.
What is the difference between cash flow vs. revenue, and cash flow vs. profit?
Cash flow, revenue, and profit are three accounting concepts that tell you about your business’s financial performance, but each one gives you different information.
We’re going to dive into the differences between cash flow vs. revenue and cash flow vs. profit – but first, let’s define terms.
Revenue is the total amount of money that your business earns from the sale of its products or services during a specific period of time. It’s reported on the income statement (and is typically the top line of the statement).
Revenue is not the same as profit, though – expenses and taxes are deducted from revenue to determine profit.
Profit, also known as net income, is what your business earns over a specific period of time, after subtracting all expenses from revenue. Profit is reported on the income statement, and it’s an essential metric because it shows whether your business is profitable or not.
Cash flow, on the other hand, is the net amount of cash moving in and out of your business during a specific period of time. Cash flow is reported on the cash flow statement, like we talked about above! This is a separate financial statement from the income statement.
Before diving into the difference between these 3 accounting concepts, we need to cover accrual basis accounting vs cash basis accounting.
When you use accrual basis accounting, income and expenses are reported when a transaction occurs, even if the funds haven’t been paid out yet. That means that even if you see income on your income statement, it doesn’t necessarily mean that the cash is sitting in your bank account.
With cash basis accounting, income or expenses are recorded only when money is received or paid out, regardless of when a transaction occurred. This means that your income statement is an accurate reflection of how much cash you have on hand at a given time.
If you are using accrual basis accounting, the cash flow statement makes adjustments to your income statement so that you can see your net cash flow, or the amount of cash that you have available.
Now, let’s get back to the differences!
Cash flow vs. revenue
Revenue is the income a business earns from its operations, while cash flow refers to the cash being transferred in and out of the business.
In other words, revenue is a metric that indicates a business’s sales and marketing performance, while cash flow is a metric that reflects a business’s liquidity and ability to pay its bills.
Cash flow vs. profit
The key difference between cash flow and profit is while profit indicates the amount of money left over after all expenses have been paid, cash flow indicates the net flow of cash into and out of a business.
Again, cash flow is the cash that flows in and out of a business’s bank account, whereas profit is the amount of money left over after all expenses have been paid.
In summary, cash flow indicates how much cash a business has available at any given time, and its ability to meet financial obligations, while profit is a measure of a business’s overall financial performance.
How to manage your cash flow by building the right tech stack
If you haven’t already, say goodbye to managing cash flow with Excel (or even paper and pen, if you’re old school). With the right tech stack, you can improve your cash flow management – and ultimately, how much cash you have in the bank.
A cloud accounting software will save you time with automation, while helping you avoid mistakes that often pop up when you’re manually tracking cash flow. Pair that with a financial planning and analysis tool, and you’re set to grow your cash flow and scale your business.
And let’s not forget about a tool to automate your accounts receivable – get paid on time by your clients and boost your cash flow, too.
But let’s take a deeper dive into some of the ways these technologies can help you with managing cash flow.
Cloud Accounting Software
While Excel is a great tool for organizing data, cloud accounting softwares like these take managing accounting tasks to a whole new level. Here are 4 examples:
- No more manual data entry. These softwares connect to your bank accounts and automatically pull in and categorize your financial transactions.
- Easy invoicing. Invoicing customers is simple and can be done all within these softwares. With customizable templates for quick creation, the ability to send and track invoices, and integrations with payment gateways for faster payments online.
- Automated tax reporting. These softwares automatically calculate taxes, provide tax reports, and track expenses, making tax prep a breeze. Plus, these features make it easier to identify tax-deductible items and maximize tax credits and deductions.
- 19x the time savings. Xero recently quantified how much time their software saves business owners like you. And yes, you read that right – Xero saves you 19x more time than if you used an Excel spreadsheet. Imagine what you could in your business do with all of that time back!
Plus, all three of these solutions offer mobile apps, providing a variety of features that allow you to manage your cash flow on-the-go.
You can check your cash flow, create and send invoices, track expenses, view financial reports, and manage customer and vendor information, without being tied to a computer – or your paper and pen.
First off – what is financial planning and analysis?
Commonly referred to as FP&A, financial planning and analysis is the practice of leveraging financial data to support decision-making in your business. In other words, it helps business owners like you better understand, manage, and improve your cash flow and financial position.
FP&A also helps you set and track key business goals, like reducing expenses, increasing revenue, or just managing cash flow better.
The devil is in the details with FP&A, and the right data makes all the difference.
Accurate financial statements like your cash flow statement, balance sheet, and income statement are key, and you can leverage them to project your cash flow into the future, estimate your future revenue and expenses, and identify areas where you can reduce costs.
Sounds amazing, but more than a little daunting, huh? That’s where a technology like Jirav comes in!
Jirav is a cloud financial planning and analysis tool that will help do these things for you.
It offers several features that can help you with managing cash flow, including the ability to create custom financial reports, track key performance indicators (KPIs), and generate forecasts based on historical data. And it provides tons of visualizations, like charts and graphs, to help you better understand your financial position.
Let’s go, tech stack!
Accounts receivable (A/R) is the payments that customers owe you for products or services that they have already received.
And when it comes to effectively managing cash flow, keeping your receivables low is a great way to do it. In order to keep your A/R low, you need to get paid before, or shortly after, delivering a product or service.
However, collecting payments on time can be a challenge. Sometimes missed payments just happen, even from your best customers.
Plus, InvoiceSherpa and CollBox plug right into your existing accounting system. Another win for building a great tech stack for your business.
So, what are you waiting for? Jump on the tech stack train and optimize your operations with modern financial tools. Your watch and your wallet will thank you!
Need a more robust accounts receivable solution?
We partner with InvoiceSherpa and CollBox to fully support all aspects of A/R. They provide the tech, and we provide the human touch to make sure you’re getting paid on-time.
Looking to outsource your A/R?
We get it. With a growing business, keeping up with new and current customers alike can get challenging.
That’s why we offer A/R services as a part of our two of our bookkeeping packages for businesses like yours. And it’s not just putting tech tools to use. We focus on humans interacting with humans instead of relying solely on automation.
As you scale, we believe that the human element is vitally important for maintaining good relationships with your customers, while making sure you get paid, of course. Our team of experts is personally responsible for each of the accounts you choose to manage with our A/R services.
How to solve cash flow problems with a business line of credit
Let’s talk about something that might help you out when your business faces a cash shortage – a line of credit.
A line of credit is like a flexible loan that you can receive for your business. And it can be a lifesaver when your business is going through tough times and you need some extra cash to keep operations afloat.
And don’t worry if you need a loan.
Borrowing money is a pretty common way for successful businesses to grow! But before you establish a line of credit, it’s important to make sure you understand the terms and conditions, and whether you’ll be able to pay back what you borrow.
How to establish a business line of credit
Here are 6 basic steps you should follow when establishing a business line of credit:
1. Make sure your credit is in good shape.
It’s important to have a solid personal credit history before applying for a line of credit. This means paying your bills on time, keeping your credit card balances low, and maintaining a good credit score.
Basically, lenders believe that if you’re good at managing your own money, then your business is probably good at paying back loans, too. Plus, having a good personal credit score (typically 700 or higher) can help you qualify for better offers, like lower interest rates and higher credit limits.
2. Review your cash flow statements.
You’ll want to review your cash flow statements before applying for a business line of credit for a few reasons. Here’s why:
To make sure you pay things off on time. If you don’t have enough money, you could have trouble making payments, which would end up hurting your credit. Looking at your cash flow statements will help you figure out if you have enough cash to pay back any new debt.
To get ready for lenders’ questions. Lenders might ask about your business’s cash flow to see if you could repay what you borrow. Looking at cash flow statements beforehand will help you prepare to confidently and accurately answer any questions that come your way.
To find ways to improve your finances. By looking at cash flow statements, you can identify areas where you can make changes to your biz’s financial management. This is an important step prior to establishing a line of credit to ensure that you’re not accruing unnecessary debt or borrowing more money than you need.
3. Find a lender.
Look around for lenders that offer business lines of credit and check out their requirements and terms. Compare rates and fees to find the best deal for your business. You should always know the details behind any line of credit you’re considering, and make sure it fits with your business goals.
4. Get your financial paperwork together.
When you apply for a line of credit, you’ll need to provide your lender with financial info about your business, like bank statements, tax returns, and financial statements.
5. Apply for the line of credit.
Once you’ve picked a lender and gathered your paperwork, it’s time to apply for the line of credit. The lender will check out your application and financial position to decide whether to approve the line of credit and how much to offer.
6. Use your line of credit responsibly.
If you’re approved for a business line of credit, be sure to use it wisely. Only borrow what you really need and make sure to pay it back on time to avoid high interest rates or other penalties. High interest rates can make it harder to keep your business afloat, which is the opposite of what you want.
How to pay bills strategically and better manage your cash flow
Applying strategy to pay business bills can help you with managing cash flow and keep your financial position in good shape. So, here are our 4 tips for paying bills like an expert:
1. Don’t pay bills too early. It might seem counterintuitive, but if you pay your bills too far in advance, you could leave your business without enough cash on hand to cover expenses, especially unexpected ones. Try to pay your bills as close to the due date as possible without being late. We know – a crazy balancing act sometimes!
2. Take advantage of discounts for early payments. We know – again with the balancing act! However, if you have bills that offer discounts for paying early, take advantage of them! Discounts here and there can help you save money and improve your cash flow. Just be sure to factor those discounts into your overall cash flow plan so that you don’t end up overspending in other areas.
3. Negotiate payment terms. If you’re struggling to pay your bills on time, it’s worth reaching out to your suppliers to see if you can work out a payment plan. Many suppliers are willing to work with you to find a solution that works for everyone, and this can help you better manage your cash flow while building stronger relationships.
4. Consider outsourcing. If you find that paying bills is getting too overwhelming, consider outsourcing your bill pay solution to our team at Acuity. Bill pay is one of the services we offer in our two of our most popular bookkeeping packages. We’ll manage your bills and payments so that you can start focusing on growing your business rather than worrying about cash flow.