Cash flow is the life blood of small businesses. Without healthy and accurate business cash flow 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 6 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 Business?
Not being ontopof your cash flow canbring your small business down. Cash flow problems small businesses facecan betheir demise. Byusing metricsand KPIs in your small business, maintaining and managing the work capital needed to operate, optimize, and grow your business is a breeze.
Some of the Benefits to Correctly Managing Your Cash Flow Includes:
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 indicated 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
Accounting firms prepare cash flow statements smbs 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 gives you sustainability – the ability to pay your bills and survive.
3. Cash Conversion Cycle
Oneofthecashflowproblems small business facesisthecashconversioncyclewhich isthe 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 haveallows youto analyzetheresourcesyouareusingto createyour serviceorproduct. It’s also important to know for figuring in inflation. Calculating your gross profit is easy. Simply 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 over extend thinking your available working capital is larger than it really is. You can figure your available working capital by subtracting your current liabilities from your current assets.
6. Balance Sheet
Another way knowing cash flow helps small business is through a balance sheet that is a financial picture of your company’s liabilities, assets, and shareholder’s equity. It is good to have for your personal information but it is important to have for investment and loan purposes too. There are two sections on your balance sheet. One is for assets and one is shareholder’s 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 cashflow statements, it’s highly advisable to hire the services out.