Managing and understanding your business’ cash flow is one of the most critical components in building a healthy business. If you can accurately project cash flow, you will steer your business in the right direction. A study by U.S. Bank found that 82% of businesses fail due to inadequate cash flow management.
In this blog post, we’ll help you understand the importance of understanding cash flow and tips to improve your business’ cash flow.
What Is Cash Flow
Cash flow is the net amount of cash being transferred into and out of a business. Cash flow statements consist of three categories: operating, investing, and financing.
- Operating cash flow is the total amount of money your business brings in from ongoing business activities, such as selling goods or services.
- Investing cash flow shows the cash generated or spent related to investment activities. These include the purchase of long-term assets such as equipment and property, stocks and bonds, as well as acquisitions of other businesses.
- Financing cash flow focuses on how a firm raises capital and pays it back to investors through capital markets. These activities also include paying cash dividends, adding or changing loans, or issuing and selling more stock.
To successfully project cash flow, you must assess your prior year’s numbers as a basis of cash flow for the following year. It is important to determine when your business will receive or spend money as part of the budgeting process. As time goes by you should update your predictions to accurately reflect your expenditures and profits.
If you are interested in learning more on how to prepare a cash flow statement we recommend looking over this article by Small Business Trends.
Common Cash Flow Mistakes
There are several common types of mistakes small businesses face when it comes to cash flow management. For example:
- Overestimating future sales
- Not tracking cash flow projections properly
- Not keeping enough cash on reserve
- Charging too much or too little for your products/services
- Stocking up on excess inventory or supplies
Tips for Effective Cash Flow Management
- Keep your books updated
- Apply for a line of credit before you need it
- Spread out your expenses to different times of the month
- Send your customers invoices as soon as possible or require deposits for custom orders
FINSYNC is Here to Help
FINSYNC empowers you to focus on having the right amount of cash on hand at the right time. We are an all-in-one platform that helps you manage cash flow while growing more profitably.
Yes, our platform includes a cash flow statement as part of the accounting package, but we also provide automated cash flow projections that;
- Show you your cash position on any day in the future on both a calendar and graphical view
- Include any known invoices, bills and future pay runs
- Can be adjusted with “what if” scenarios to better help you analyze different decisions
Interested in getting your finances in sync? Try a 7-day free trial today.