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Cash Flow Management: A Guide for Online Business Owners

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Many businesses have failed due to poor cash flow management, which makes it imperative that you manage your cash flow properly. Any organization needs a steady cash stream to pay salaries, pay bills, and invest in growth. For this reason, it is crucial to understand where your money comes from and how your revenue will grow to secure your business’ success.

 

In this article, we will talk about cash flow management, cash flow statements, and tips for managing better cash flow.

 

Let’s get to it.

 

What is Cash Flow Management?

 

The cash flow management refers to the process of monitoring and optimizing your cash flow. More precisely, cash flow management involves tracking the amount of money coming into and going out of your business. Understanding cash flow management will improve your ability to accurately forecast your company’s profits and identify investment opportunities.

 

Your cash balance will be lower at the end of a period if the difference between inflows and outflows is negative. So, keeping track of your cash flow is paramount to avoiding this and ensuring that you always have a higher cash inflow than a higher cash outflow. Sound cash flow management can benefit your small business in many ways, including expanding and investing.

 

What Is a Cash Flow Statement?

 

 

The financial statements that summarize a company’s cash flow are called cash flow statements. A company’s cash flow statement includes all cash received from its ongoing operations and external investments.

 

Using the cash flow statement, you can determine your company’s flexibility, liquidity, and performance. A company’s cash flow statement provides valuable information about its profitability and future prospects too. In addition to determining a company’s strength, it provides information about its ability to pay its expenses.

 

By comparing cash from operating activities to net income, cash flow statements reveal a variety of information, such as the quality of earnings. A company’s earnings are higher when its cash from operations exceeds its net income.

 

How Do I Read a Cash Flow Statement?

 

There are three types of cash flows represented on a cash flow statement. And by understanding them, you can easily read cash flow statements.

 

  • Operating Activities cash: It encompasses all types and sources of cash related to a business. The cash earned from the sale of products is included in this category.
  • Investing activities cash: This category includes investments, assets, and equipment transactions. Purchases or sales of equipment and vendor loans are examples.
  • Financing activities cash: Lastly, we have cash flow from financing activities, which details the cash you receive from banks and investors and the cash you pay to shareholders.

 

Difference Between Cash Flow, Profit, and Revenue

 

Cash flow

 

A business’s net cash flow is measured as the net amount of cash and cash equivalents being transferred in and out. A good way to describe cash flow is that it’s your business’s lifeblood, and you need to keep it flowing by generating cash as well as consuming it.

 

Your goal should be to generate a positive cash flow. Positive cash flow indicates that your business’s liquid assets are increasing. Also, it can be used to settle debt, reinvest in the business, pay out dividends to shareholders, or as a reserve for future financial struggles your company may face. Additionally, calculating different versions of cash flow gives you additional insight beyond the standard cash flow statement and details.

 

With free cash flow, you can see operating cash flows more clearly since it excludes non-cash expenses and interest payments.

 

  • Levered free cash flow shows cash flow after all bills and obligations have been paid.
  • Unlevered free cash flow shows cash flow before financial obligations.

 

Profit

 

A company’s profit is the earnings left over after all expenses, debts, and additional sources of income are taken into account. Net income is also known as profit, which comes in three forms:

 

  • Gross profit: Gross profit in the production of goods is calculated by subtracting raw material costs, labor costs, and manufacturing costs from revenue.
  • Operating profit: That is the profit after deducting rent, utilities, payroll, and other fixed and variable expenses from revenue.
  • Net profit: Finally, net profit is what remains after all expenses, including taxes and interest, have been paid. In addition, the net profit can be calculated by balancing the three cash flows (operating, investing, and financing).

 

Revenue

 

Normally, a business earns revenue through its business activities and operations. Revenue is the amount of profit after subtracting costs that determine the net income. Having a positive revenue stream from the beginning is crucial to a business’s success.

 

Revenue can be divided into two categories:

 

  • Operating income: Operating income is the revenue the company generates from its primary activity or routine operations, such as selling goods and services.
  • Non-operating income: This is revenue derived from secondary sources, such as proceeds from asset sales or litigation awards. They are often unpredictable and only happen once, which is why they are referred to as one-time revenues.

 

Revenue for government agencies includes taxes, fines, fees, intergovernmental grants, sales, etc. A non-profit’s revenue is derived from grants, donations, investments, and fundraising activities. It is essential to understand what revenue is and how it impacts your business’s finances.

 

Tips to Manage Your Cash Flow Effectively

 

Here are some of the tips to manage cash flow effectively and avoid cash management problems:

 

  • Frequently project your cash flow situation, how much money you’ll make (guess your sales volume, etc.) and how much you’ll spend (forecast your expenses, estimate your ordering, etc.) – and take action based on them.
  • Conduct extensive research on new clients and examine their financial standing using financial ratings, local partners, or alternative sources of information.
  • Invoice customers as soon as possible and set clear payment terms to avoid bad debts: follow credit control best practices to avoid late invoices. Establish a process to ensure your invoices are paid on time and define what you will do if an invoice is not paid on time.
  • To avoid problems, keep an eye out for debtors, invoices with massive amounts, and loan payoff deadlines.
  • Invest wisely and avoid overspending. If you are considering a significant investment or if you are planning to expand your business, always assess the impact on your cash flow, and investigate the markets and sectors involved.
  • Keep a portion of your income aside for unplanned expenses to maintain cash reserves.
  • Improve your cash flow management by teaching your workers’ credit control skills (or hiring someone who does).
  • Maintain your cash flow using software that tracks your expenses and invoices while providing a clear picture of your finances.

Biggest Mistakes You Can Make When Managing Your Cash Flow

 

Payment errors

 

Manually managed finances are prone to errors. And a small error can have a considerable impact on your cash flow when it comes to your business. If you pay the same bill twice or make the wrong payment to the wrong supplier, you may not have enough money to pay the bills. Maintain thorough and current financial records. You will be able to detect and correct any errors quickly this way.

 

A failure to collect receivables

 

Keep track of your receivables. Late payments have a negative impact on your business’s cash flow. When customers do not pay on time, it is complicated for you to cash in on your profits. Make sure your business does not suffer from a lack of funds because of late payments. Invoice overdue sales immediately after payment is late. Provide customers with information about late payment penalties in advance.

 

Not preparing for possible disasters.

 

It is inevitable that businesses will have bad days. Unexpected expenses, late payments, and insufficient funds to cover monthly expenses are all inevitable. In situations where expenses are excessive, and cash reserves are low, disaster is inevitable. Saving money is the key to building up a substantial cash reserve for businesses. According to financial experts, your company should save up to three to six months’ worth of expenses.

 

Calculating profits based on cash flow

 

Cash flow is not the same as profit, despite what is often assumed. The cash flow of your business is the sum of money entering and leaving your business. The profit is what remains. After all, operating costs have been deducted from revenue. With negative cash flow, a business can still be profitable. There are, however, many challenges associated with such a scenario.

 

Sales projections are too optimistic

 

Optimism is essential for business owners. However, when your head is too high in the clouds, you can lose sight of your product or service’s greatness. The majority of people who come into contact with your brand will not purchase from you. It is always a good idea to set realistic expectations regardless of whether sales spike during certain times of the year (e.g., holidays). Cash flow problems can be caused by optimism. Make revenue forecasts based on facts rather than wishful thinking, even though it isn’t easy.

 

Conclusion

 

Cash is at the heart of financial management. And it will impede your business operations if you do not have cash available. Understanding when cash will be available to you, what you can do to get more cash into your hands faster, and managing your spending to avoid cash flow problems is what managing your cash flow is all about.

 

It takes a lot of work and planning to make money during your busy season, but you need to cover your basic expenses throughout the year, as well as additional expenses during those busy months. However, keeping everything in order can still be challenging, even with a year-round business. But with a clear cash flow statement in place, you can have a better picture of your business.

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Kayla Bloom

Kayla Bloom

Kayla Bloom is a freelance Finance Writer specializing in topics related to Accounting, Bookkeeping, Taxes, and Business Finances. She lives in Miami, Florida.

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