21 September 2020
Being a business owner can have a lot of pressure. You're investing a lot of your time, and most likely a good amount of your money, into building a business that succeeds.
There's no shortage of content in the world with tips on how to cultivate a successful business, and you may be noticing that the term "cash flow" pops up a lot. And for good reason!
We'll cover the basic ins-and-outs of what cash flow is, why it's important for your business, and how to calculate it.
In fact, we even provide you with a FREE Guide on How to Calculate Your Cash Flow. Use it to get a jumpstart on things, or keep it for reference in the future.
Small business cash flow management doesn't have to be hard. Download our FREE guide to calculate your cash flow
Cash flow for a small business is essentially the money that you have at the end of the month to carry over into the next, after you've paid all of your bills and other expenditures. A simple suggested formula for cash flow looks like this:
Money your business makes monthly — the cost of running your business (utility bills, gas, business insurance, payroll, etc.) = what you have left.
That money you have left is your cash flow. You also may hear it referred to as "free cash flow."
It’s likely that the larger and busier your business is, the more expenditures you'll have, and the more complicated the above equation will become. This includes when you begin hiring, as your payroll can be a large operating cost for a small business. Remember to list it as one of your line items when calculating!
That said, one of the most important things you'll want to keep an eye on is whether your small business cash flow is positive or negative. If you have a positive cash flow, you have money left over at the end of the month. If you owe your business money at the end of the month because you didn't make enough money to cover basic expenditures, then you have a negative cash flow.
In this article we'll cover some basic definitions of cash flow and show you how to calculate it for your small business, with the end goal being to help you understand how to ensure you're always staying positive!
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Your business may be on the smaller side, but regardless of whether you're just starting out or you're a seasoned business owner with experience under your belt, it's always a good idea to learn more about how to improve your accounts.
I own a small business, and although my expenditures aren't many and calculating my cash flow is relatively simple, I still consider it a good idea to understand these definitions so I can understand the health of my business.
Don't be intimidated by this term — you already know what it is! Operating activities are what you spend on and receive money for throughout the month. This can include things like property or the cost of equipment, but if you're financing and investing any stocks or bonds, you'd typically leave those out when calculating the operating cash flow.
It's a bit like balancing your checkbook to see what's going out and what's coming in. If you're ever in a spot where an investor or bank is looking into your liquidity, you may be asked to show documentation of your operating cash flow.
This is an item on the cash flow sheet that can apply to companies that are more mature and working with more revenue (and some day could certainly be you!). If you've made investments in stocks or bonds, then those activities would fall under this category in your small business cash flow sheet.
It's perfectly normal to accept a loan to help your business get started or continue moving forward. If you have any investors, lenders, or shareholders that you owe money to, then the details of paying them back would be considered as financing activities.
OK, we're about to do some light math to show an example.
Don't panic! Get a piece of paper and a pen. You can use the calculator you have on your phone, or even do it in your head (or on your fingers)!
1.) What's in the bank?
To start, mark what you're starting with. For this example, let's say you have $5,000 in the bank.
2.) What's your net income?
Write down your net income for a month. Remember this is after taxes have been taken out. For this exercise, we'll say you made $10,000 this month.
3.)Add those two together. You have $15,000. This is how much cash you have coming in.
Next, let's calculate your cash out.
4.)Calculate your monthly expenses. Here's an example:Monthly rent for space: $2,000 Credit card payment: $500 Possible expense #1: $700 Possible expense #2: $150
The total comes to: $3,350
Subtract your cash out from your cash in. $15,000 - $3,350 = $11,650
The $11,650 is the amount you can roll over into next month's accounts. This is the cash that is flowing into the next month.
Keep in mind that the numbers involved in the equation above (and that are included in the template at the bottom of this article) will become more varied as your business grows and you utilize more products and services, take on investors, etc.
Don't think too much about the numbers you may have to incorporate into your calculations in the future. Like we mentioned earlier, what you want to pay attention to now is how much money you have flowing from one month to the next.
At $11,650, this is a positive cash flow, as the example business has money to move forward to the following month. But consider if the starting costs were lower and/or the monthly expenses were higher. It's very possible that a company could have negative cash flow, meaning they lost money that month and are carrying debt forward into the next month.
As you notice your cash flow, look out for the patterns from month-to-month. Are you roughly earning, losing, and carrying over the same amount of money each month? Are you noticing any drastic differences?
Where may you be able to make expenditure cuts? Is there a possibility to increase sales or promote your services more, in hopes of upping revenue?
It's a good idea to be familiar with the simple ins-and-outs of your business's finances, and understanding your cash flow is a helpful way to set yourself up for success.
But if you're like me, you're an expert in what you do. And unless you're an accounting professional who owns a small business, there's a good chance that accounting and bookkeeping are not in your primary wheelhouse. I know they aren’t in mine!
There is no "right" time to consider hiring an accounting professional to consult with on your small business cash flow patterns and your books. So having an outsider's perspective, who also happens to have expertise in accounting, could be beneficial to your business.
Sure, hiring someone may cost some money, but if after doing your initial cash flow analysis you have some funds available, you could consider consulting someone.
So what is the status of your cash flow, anyway? Find out here by downloading our FREE Cash Flow template!
I’ve told stories since I learned to talk and written since I could hold a pen. As a small business owner myself - I'm a freelance writer and yoga teacher - I love contributing to the entrepreneurship community in different ways (including writing for Simply Business!). When I’m not drafting articles for SB, I can be found on my yoga mat, perusing an indie bookstore, and writing (with my cat nearby of course).
This content is for general, informational purposes only and is not intended to provide legal, tax, accounting, or financial advice. Please obtain expert advice from industry specific professionals who may better understand your business’s needs. Read our full disclaimer
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