As a small business owner, understanding your cash flow is crucial. To make things as simple as possible, here are a few quick explanations. If you’re confident you already know your profit from your petty cash, head to the next section, where we’ll cover precisely why keeping an eye on your cash flow is so important.
If your business runs out of cash and cannot borrow from somebody, it is probably about to fail.
Cash Flow is the money that’s flowing in and out of your small business – hence the name. Having a positive cash flow means that more money is coming into the business than going out. It’s just as important as profit when it comes to determining your business’s performance.
Keep in mind, you might have a high overall profit but if cash flow is low, then you may still face problems like overspending or ordering too much stock. Fast-growing businesses tend to require more cash to buy stock, hire employees, etc., so it’s vital to keep an eye on cash and cash flow.
Profit is the amount of money left once total costs have been deducted from revenue. Obviously, the higher the number, the better. If the costs outweigh the overall revenue, then a business has operated at a loss and is in financial trouble.
Petty Cash is a small amount of money used to make small purchases when needed. You use it for quick things like posting a letter or for a round of coffee before the morning client meeting. These expenses should be recorded, so make sure to keep all of your receipts.
All three of these elements are essential to the health of a business, but it’s important to know that they’re different. Just because profit is looking healthy, it doesn’t mean you have a positive cash flow to support growth.
Why Keeping on Top of Your Cash Flow is So Important
1. Make Better Plans and Decisions
With an accurate cash flow statement, you’ll know the exact amount of funds you have available at any given moment. This is vital because any plans and decisions you make must be supported by accurate information. If you don’t manage your cash flow carefully, you could be making bad decisions that put your business at risk.
You may feel your business is in a strong position, but a cash flow statement could show that there isn’t much money coming into the business that particular month. This could be because you haven’t issued invoices to clients. Whatever the reason, with an updated cash flow statement, you’ll know not to make any significant purchases at that time.
2. Understand Where You’re Spending Money
Managing your cash flow effectively will help you gain a better understanding of where you’re currently spending your money, something that’s not always clear on a profit and loss statement. It’s important to know exactly where the money you spend is going and why.
It isn’t always easy to see expenditures in black and white, which is why it’s so important to manage your cash flow effectively. You might be able to identify areas of the business where you can cut costs.
3. Protect Business Relationships
If you’re having cash flow problems, you may not have the funds to pay your suppliers. This can harm the business relationship you have with them and damage your overall reputation.
Set payment schedules to ensure you have the finances available to pay suppliers. Advanced planning is vital so you don’t face multiple invoices or bills at the same time without the funds to deal with them.
4. Expand at the Right Time
Growing and expanding your business is exciting. It means new markets, new staff members, and more revenue. But, a word of caution: expanding at the wrong time or in the wrong way can lead to long-term issues.
By keeping a close eye on your cash flow, you’ll be able to identify the right time to expand. This way, you can ensure you have the necessary funds to support growth without putting your business at risk.
Understanding and managing your cash flow is crucial for the success and sustainability of your business. By staying on top of it, you’ll be better equipped to make informed decisions, manage expenses, maintain healthy business relationships, and grow your business strategically. Keep your cash flow positive, and your business will be well on its way to achieving long-term success.
For more information on managing your cash flow or any other bookkeeping needs, don’t hesitate to contact Keeping the Books, your trusted partner in financial management.
