As a small business owner, you want your venture to grow and thrive. To maximize your business’s potential, it’s so important to have a good grasp on your cash flow. Understanding proper cash flow management will help you stay on top of how much your business is earning.
Cash flow is just how much money your business takes in or spends over a period of time. There are few different principles of cash flow, and having a basic understanding of these will help keep your business financially on track.
The 4 Types of Cash Flow
1. Net change in cash
Calculating this is simple. Add up your cash from operating, investing and financing over a period of time, and the result is the net change in cash.
2. Cash from operating activities
This is the amount of money a business takes in from its regular business activities. For instance, a bookstore sells books, and the money generated from its sales is its cash from operating activities.
3. Free cash flow to equity (or FCFE)
FCFE is cash that is available after capital expenditures (reinvestment into your business). This important metric gives a business an idea of what excess cash they will have available after investing in infrastructure and capital equipment used in business operations. The remaining cash can be used to expand the workforce or offer increased benefits for employees.
4. Free cash flow to the firm (or FCFF)
FCFF is the cash a business has available after some other important items are accounted for. These are: depreciation expenses, taxes, working capital and investments. If there’s money left over after these expenses, that’s a good indicator that it’s financially healthy. If there isn’t, it means revenue is too low.
5 steps for managing cash flow
Cash flow management shouldn’t take away from your business operations. Even if you don’t have a dedicated accounting staff, there’s a few easy tips to stay on top of your cash flow so there’s no surprises.
One of the most important things you can do is make sure your customers pay on time. If you are waiting for payments, you might not have enough to pay your bills and expenses when they are due, which creates more problems in fees or harm to your credit.
1. Make sure your books are accurate
A thriving business is built on solid bookkeeping. If you don’t know what’s happening with your bottom line, there’s no room to adapt to changing conditions. Incomplete or incorrect bookkeeping is one of the biggest reasons that businesses fail.
Reliable measures help you to understand how to optimize your company’s operations. You can budget money to plan for expenses, and never be caught off-guard when unexpected issues arise. You can see exactly what amount of money is going toward each part of your operations, and make adjustments to achieve optimum efficiency.
2. Improve your invoicing process
Streamlining your invoicing process is a powerful way to control your cash flow. Stick to a regular schedule of invoicing. This should make incoming payments more regular.
Have a system to account for past due amounts. Be quick to follow up with late-paying customers. Using a software tool is a great way to automate this process, and prevent any cash from falling through the cracks.
Managing receivables will make sure that you’re capturing all the money that is owed to your business in a timely manner. A solid invoicing process will help guarantee you have cash on hand when you need to pay your bills.
3. Cut down on unnecessary costs
As the marketplace changes, you need to adapt and make changes to stay profitable. Set aside time to review your list of vendors. See if you can negotiate better prices.
Look at your administrative and operating expenses. See if there are areas that you can become more efficient by cutting down on duplication, wasted staff time, even utility costs.
4. Keep your business and personal finances separate
Mixing your business and personal expenses makes good cash flow management much more difficult. Business accounts are also now a necessity for many e-commerce sites.
Having a separate business account through NorthOne will help you stay on top of your finances. NorthOne was specifically designed for small businesses. You’ll have all the tools you need to manage your cash flow and grow your business.
5. Hire a professional bookkeeper
When your cash flow becomes too complex to handle alone, it’s time to invest in a professional bookkeeper.
While a bookkeeper doesn’t need to be a professional accountant, they should be someone who is very organized and understands business finance.
Learning how to manage cash flow doesn’t have to be complicated. All it takes is an understanding of the key concepts, and a commitment to stay on top of your books. By doing this you’ll take a huge step towards a thriving, profitable business.
If you’re currently looking for a business bank, NorthOne is a trusted, reliable source for banking needs and cash flow management. Sign up for NorthOne today and get a limited time reward of $50 when you deposit $50.