Cash Flow 101 for Small Businesses
Just how important blood is in our body? Can we live without it? NO! … the same thing with cash in a business. Your business won’t survive without any cash. Because, for the nth time, cash is queen! — been our favorite line and will always be.
Now, being a small business owner, the world won’t expect a diploma in finance or any accounting-related course from you, but your business expects you to have at least the knowledge on how you make it survive in the long term. HOW? By managing your cash flow!
Cash flow management is critical, it’s the lifeblood of your business. In your business, cash flows into your business via revenue or financing and out (outflow) via expenses. It is your job to track and manage to fully benefit from the transactions. (Check on the link to learn more about Cash Flow 101 from tracking to management of cash flow.) Now, you will get to know the 3 components or movement of cash flow in your business, which is also summarized as your Cash Flow Statement, which comprises of:
CASH FROM OPERATING ACTIVITIES
Are you tracking the money coming in from your sales? How about the cash you’re spending on inventory and everyday operating expenses?
These are considered as operating activities – cash flow from what you do daily to make a profit. It is all about the money that comes in and goes out from your main business activities.
Think of it as the heartbeat of your business.
For example:
- Money you get from sales
- Cash you spend on buying goods
- Adjustments like depreciation
- Payments made for prepaid expenses
CASH FROM INVESTING ACTIVITIES
Have you recently bought or sold any big assets like new buildings or new equipment? These are considered as investing activities. The cash flow from your investing activities helps your business grow in the long run.
For example:
- Buying or selling buildings, land, or equipment
CASH FROM FINANCING ACTIVITIES
Did you borrow money to expand your business? Or did you pay back any of your loans? These are your financing activities. It is about the money your business gets or pays out for loans and other financial transactions.
In short, it is the cash flow from how you finance your business.
For example:
- Paying out dividends
- Getting money from issuing notes payable
Ideally, the higher and more positive the cash flow, the better!
Why?
This indicates that your business has enough funds to meet your obligations and debts and fund the cash requirements of your day-to-day business operation.
To know the different activities your business had in a certain period, click the free worksheet below and use it to kickstart helping you understand how to prepare a cash flow statement for your business. The worksheet will help you practice and get to know the basics of identifying the operating, investing, and financing activities of your business. Once you identify what kind of business activities your cash flows are, it is now time to do the challenging part, preparing strategies to manage your cash flows that are aligned with your financial goals.
Want to chat more about cash flow management and aligning them with your financial plan? Hop into our Finance Savvy CEO membership group here and let’s get your cash flowing!
