What is Cash Flow?
The movement of money in and out of a business includes inflow from operations such as the sale of goods and services, loans, lines of credit and asset sales. Cash flow also has an outflow, which is from things such as business expenditures, loan payments and business purchases.
These Two Figures Must Be Balanced to Maintain a Reasonable Cash Balance.
A good cash flow system will help you manage funds to cover operational costs and bills and help foresee potential problems down the road.
Profit and loss statements and income statements can help determine projections for future cash flow trends. A cash flow analysis statement, however, will do a better job by accounting for non-cash items and expenses to adjust profit figures.
Knowing where your money is, where it’s going and how to get more when you need it can make running a small business a lot easier. Here are some things to know about setting up a cash flow statement:
Operating Activities
The basic elements of cash flow are:
- Starting balance. Know how much cash you have on hand at the start of each month.
- Cash in. This is all cash received during the month, including sales, paid receivables, interest or cash from sales of assets or stock.
- Cash out. This is all fixed and variable expenses.
- Ending cash. Add starting cash to cash in for total cash, then subtract cash out.
Having this final number will help show what the cause is if you’re short cash. For example, you may have a negative cash flow one month because a supplier raised prices that you didn’t anticipate, or a customer didn’t pay you on time.
To better monitor cash flow and keep track of your business operating activities, follow basic business practices such as using pre-numbered cash receipts, deposit checks daily, send customer invoices within two days, collect receivables within 60 days, offer cash discounts, and using pre-numbered checks for all disbursements.
Investment Activities
This section of a cash flow statement reports inflows and outflows from purchases and sales of long-term business investments such as property, assets, equipment and securities.
If your bakery, for example, buys an additional piece of kitchen equipment, that would be an investment and accounted for as an outflow of cash. If your business sold some equipment that was no longer needed, that would be an inflow of cash.
Financing Activities
Money that is related to financing your business is also accounted for in a cash flow statement. A small business loan would be an inflow of cash, and loan payments would be an outflow of cash.
Other financing activities include emergency savings in liquid cash accounts, capital improvements, profit sharing, increasing wages to retain your best employees, and investments.
Rockland Trust helps with cash flow efficiency by offering an investment sweep, which is an investment account that maximizes a business checking account balance by automatically investing excess funds overnight while still allowing funds to be moved back to the checking account to cover payments.
Rockland Trust also offers a loan sweep of excess funds over a designated target balance in a checking account to be used to pay down short-term borrowings on a line of credit. If the checking account drops below the target balance, a draw down is done on the line of credit availability to pay the presented payables.
How to Start One
Making cash flow projections and computing cash flow statements can be difficult. A business accountant can help, as can help from a business expert at SCORE, a group of volunteer business people who help small businesses. SCORE offers a 12-month template and a 13-week template to help with approval for a business loan. Accounting software may also help.
The U.S. Small Business Administration recommends starting with at least a simple spreadsheet listing all income from sales each day, week, month and year, along with all of the expenses that a company has to pay out. This will allow you to come up with a break-even analysis.
The SBA also recommends having enough cash on hand to cover slow months in business. Carrying three to six months of cash reserves should help cover all unknown or variable expenses that may come up, according to the SBA.
