If you’re a new business owner or still taking the steps to become one in the future, these tips are essential for laying out your business from the numbers side of the equation.
If you’re an entrepreneur with a business idea you’re sure will find success, it’s important not to lose sight of the foundational financial limitations that often spell disaster for small businesses who lack the foresight to plan their business around a stable cash flow. This is particularly a problem for business owners who are embarking on their first adventure into entrepreneurship. Running a business yourself can be exponentially more complicated than managing just one piece of it as an employee.
On top of this, it’s important to realize that these kinds of core financial issues don’t only apply to small businesses. Enterprise-level entities can also find themselves reeling from poorly managed cash flows when significant changes in income level or expense fees mount too quickly. For larger companies, adjusting to an increasingly unstable cash flow can sometimes be an almost insurmountable challenge as multiple departments must work together to effectively bring the cash flow back to a balanced state.
The difference between profit and cash flow
The stigma of “profit” being the baseline metric by which business success should be measured is a gross oversimplification of the real scope of important finance measurements.
Cash flow, unlike profits and expenditures is a relationship between a series of different metrics rather than a bare number figure. Your business’ income, for instance, is not the only channel by which cash flows in to your company. Likewise, your expense sheet is not a true measure of how your cash flows out.
To illustrate this, let’s say you’ve just made $800 through a sale to a client, however they have not actually paid you yet. While your bank statements don’t yet reflect the money as income, it’s still contributing your cash flow from a practical point of view.
Similarly, if you’ve just finalized an order for supplies but your vendor has yet to present the bill, it’s still useful as an expense even as a concrete projection. The underlying point here boils down to this: income statements aren’t cash flow measurements.
What to consider when you balance your cash flow
No matter how accurately you can measure your cash flow, it’s not a crystal ball. The unexpected expense can still strike even when companies break out the microscope on their finances. However, the more complete your list of cash flow contributors is, the better you’ll be able to see potential money hazards looming in the distance. Let’s break down the essentials of generalized cash flow so you can be confident nothing is slipping by you.
The golden rule here is a commonsense one: your cash should flow in faster than it flows out. The three big contributors to keep a firm grasp on are:
• Sales in cash
• Accounts receivable (sales in writing that have yet to be paid)
• Reinvestment into your own business
The major factors contributing to your outflow are:
• Equipment purchases
• Accounts payable (the inverse of accounts receivable)
• Deposits for building or equipment rental
• Any loan payments you can account for as regular payments including any interest involved
• Purchases and payments for third party services and outsourced tasks
• Employee wages, payroll taxes, and benefits
With so many pieces to the cash flow puzzle, it’s wise to reevaluate it on a monthly basis rather than an annual one. Depending on your company’s level of stability, these sessions can then be moved to a quarterly task if a monthly recurrence seems redundant.
If you want to squeeze cash flow predictions for all they’re worth, you can use your findings to run potential sales scenarios on yourself to see how better or worse business will affect your growth rate and ability to bounce back in times of stress. Start by taking your cash flow estimates and applying percentage points of sales growth or reduction.
The quality of your financial predictions is tied directly to the completeness of your calculations. Although your future revenue can never be positively assured, you can at least get a firm hold on your expenses.
If you’re in need of accounting assistance managing your business, consider outsourcing the work to receive the most effectively balanced budget possible. Contact us today.
Photo credit: barsen
