Cash flow is the lifeblood of small businesses. Without healthy and accurate business cash flow analysis and management, your business will experience cash flow problems small businesses encounter when they don’t have a clear-cut strategy and all the facts in place. The six cash flow metrics and KPIs will help you stay on top so your business can flourish and succeed.
How Does Managing Cash Flow Help Small Businesses?
Not being on top of your cash flow can bring your small business down. Cash flow problems small businesses face can be their demise. By using metrics and KPIs in your small business, maintaining and managing the working capital needed to operate, optimize, and grow your business is a breeze.
Some of the Benefits of Correctly Managing Your Cash Flow Include:
1. Cash Ratio
Cash and cash equivalents include such things as legal tender cash, bank drafts, checks, and any quickly converting asset (90-day cash out). Cash holdings give you the most conservative measurement of liquidity. A cash ratio measures the liquidity of your business and how able it is to pay off short-term debts. When determining how much you qualify for in financing, this ratio is often used by the lender. A ratio of 1.0 might equal the amount you need to pay off liabilities you currently have, but having a ratio under 1.0 over time could indicate financial issues because it could be an indication of weakness within the business. Knowing the cash ratio is imperative, as you can see.
2. Operating Cash Flow Statement
Prepare cash flow statements with one of the best small business accounting firms so that businesses can see how their cash flow is working or not working for them. It is found by dividing cash flows by your current liabilities. A cash flow statement has to do with cash flow that is relative to assets, investments, and operations, of which operational cash flow is the most important. The metric shows the cash flow from the core activities in your business that does not include loans, investments, and such, so it is a more accurate indicator of your actual business flow of cash. Operations give you sustainability – the ability to pay your bills and survive.
3. Cash Conversion Cycle
One of the cash flow problems a small business faces is the cash conversion cycle, which is the length of time it takes for your inventory and other investments into cold cash or liquid assets. Rising inflation has brought about hardships such as longer customer pay-out terms and higher commodity prices, so knowing and understanding your cash conversion cycle is imperative.
The longer your conversion time is, the more challenges you may face, like paying bills on time and having insufficient working capital.
4. Gross Profits
The money your business brings in after subtracting the sales and production costs is the gross profits. Without knowing this figure, your small business is sunk. Measuring the amount of gross profits you have allows you to analyze the resources you are using to create your service or product. It’s also important to know for figuring out inflation. Calculating your gross profit is easy. Subtract the cost of your goods from the revenue. Be sure to figure in all things.
5. Available Working Capital
Another important factor in business cash flow management is the immediate cash you have to invest in growth opportunities and to cover emergencies or invest without having to get a loan. If you have enough working capital, you can comfortably invest without worry, even if you don’t have the immediate cash flow on hand. Knowing this figure is important so you don’t miss opportunities but also so you don’t overextend thinking your available working capital is larger than it really is. You can figure out your available working capital by subtracting your current liabilities from your current assets.
6. Balance Sheet
Another way knowing cash flow helps small businesses is through a balance sheet, which is a financial picture of your company’s liabilities, assets, and shareholder’s equity. It is good to have your personal information, but it is important to have it for investment and loan purposes, too. There are two sections on your balance sheet. One is for assets, and the other is for shareholders’ assets and liabilities.
The Sum of It All
These 6 cash flow analysis points are vital to reduce or eliminate cash flow problems small businesses may fall into. If you don’t have the knowledge or time to prepare cash flow statements, it’s highly advisable to contact us today and outsource these services.