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 a 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 links to know more about cash flow tracking and management.) 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:
1. CASH FROM OPERATING ACTIVITIES
This refers to the main activities of your business to produce income
Examples: Cash from sales, Purchase of goods, Depreciation, Prepaid expenses
2. CASH FROM INVESTING ACTIVITIES
This shows the investment your business does or cash business transactions related to long-term investments of your business
Examples: Purchase or Sale of building/land/equipment [FIXED ASSETS]
3.CASH FROM FINANCING ACTIVITIES
This refers to cash transactions related to raising money from debt or repaying a debt to finance your business
Examples: Payment of dividend distribution, Proceeds from the issuance of Notes Payable
Ideally, the higher and positive the cash flow, the better! Why? Because this indicates that your business has enough funds to meet your obligations and debts, 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 in 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 to 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!