Unless you’re a financial professional, tracking cash flow can seem like an overwhelming task. However, calculating your cash flow is critical to running a successful small business.
To stay on top of finances, your company’s cash flow should be evaluated on a quarterly and monthly basis; weekly or daily evaluation is a smart idea.
The description of cash flow is pretty simple: Cash in minus cash out.
Investopedia gives a more thorough explanation: cash flow is the net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's liquid assets are increasing. With liquid assets, a company can settle debts, reinvest in its business, pay expenses and provide a buffer against future financial challenges. Negative cash flow indicates that a company's liquid assets are decreasing.
Net cash flow is different from net income. Net income includes accounts receivable and other items for which payment has not actually been received.
Cash flow is used to assess the quality of a company's income, that is, how liquid it is, which can indicate whether the company is positioned to remain solvent. Having positive cash flow is crucial if applying for a small business loan. Small business owners must have the ability to make required loan payments.
Below are six essentials of a cash flow statement:
1) Cash Balance
Start with your total cash balance at the start of a specific time period
Operating activities are the main source of the company’s cash, direct and indirect costs associated with selling a product or service.
Investing is buying and selling assets or securities not related to the inventory and other operations. Examples of long-term assets include property, equipment, investments, stocks and loan payments that have been given or received by the business.
Financing activities include issuing or purchasing stock or equity, borrowing money, repaying debt and distributing dividend payments.
5) New Cash Balance
Add positive numbers (inflows) and negative numbers (outflows) of cash under operating, investing and finance activities, and then add those three values together. Subtract the previous statement’s cash balance from current period to determine the net increase in cash and cash equivalents.
A cash flow forecast is considered one of the most critical early warning systems for companies that operate with debt, and should be done on a regular basis.
If you need additional help, check out this Cash Flow Calculator from BPlans.
You can use low cost financing to shore up your cash flow. An SBA loan is the best bet for entrepreneurs with low rates, long terms and low monthly payments. Visit SmartBiz today and discover in about five minutes if you’re qualified for an SBA loan.