Understanding Cash Flow: The Fuel that Feeds our Business

Attention Startup founders, have you ever had to struggle to manage your cash during month-end to cover your expenses?

Also, are your expenses always higher than your available cash?

If yes, then welcome to the team, as you are not alone!

Many businesses owners scramble with cash flow issues as cash flow isn’t one of their expertise areas.

But, I got your back! After this article, you can stand out from this crowd by actually knowing your cash flow and by avoiding the same mistakes again.

Let’s first understand what a cash flow statement is!

The word cash flow is simple enough to get an idea of what it means. And by being a part of the business world, it’s a common word that we can hear off in our day to day lives. Cash flow statement tells us the amount of money flowing in and out of your business. (Kitna paisa aaya, kaha se aaya aur kitna bahar gaya, and kaha gaya).

When you have more money flowing in your business than out of your business, you have a positive cash flow vice versa when more money is flowing out of your business than coming in, you have a negative cash flow. It’s also called as being “in the red”.

Why Cash Flow Matters the most ?

After learning what cash flow is, it's crucial to consider why having a positive cash flow is so important for your company.

1. It keeps your Startup Running

Your business activities could end abruptly if you don't have enough cash on hand to cover your expenses and by managing your company's cash flow, you can keep operations moving forward.

2. It informs your Business Strategy

Understanding cash flow can help you make better strategic decisions for your business.

For example, taking an scenario where you need to purchase an equipment. Calculating your business’s cash flow can help you make the best decision around when to buy the equipment and will help prevent a cash deficit in the business.

3. It helps in Planning for the Future

Analyzing your cash flow statistics might also aid in future planning for your company. Suppose the following: You run an artisanal ice cream store, and the summer is your busiest season financially. Knowing how much money you need to set aside for operating expenditures during the slower seasons will help you manage your cash flow.

“Revenue is vanity, profit is sanity, but cash is king.”

Components of Cash Flow

You know what cash flow is. You know why it’s important. But how, exactly, do you determine your cash flow?

While your balance sheet can show you how much cash you have on hand, cash flow statements provide more granular information on how and where money is entering and leaving your company (the cash inflows and cash outflows) over the course of a given period.

The components of cash flow are broken into three parts:

1. Operating Activities (Roti)

Wondering, why we call operating activities as roti (Food)? So, just like food is essential for our survival, Cash flow from operating activities are also necessary for the survival of the business. Operating Activities details cash flow that’s generated once the company delivers its regular goods or services (day-to-day Kamai aur kharcha).

While an positive cash flow from operations is generally a good sign, but a negative cash flow doesn’t always indicate a bad sign.

Well, we individual also do fast for the betterment of our health. So, why not business’?

2. Investing Activities (Kapda)

As clothes protect us from the external factors in the time of need, Investing activities also helps & protects us our business from external uncertainties. It includes cash flow from purchasing or selling assets. A company needs to spend money on equipment, buildings, land, etc., to grow or maintain its business.

Cash flow from Investing helps to understand the managements mindset and future potential of the company

3. Financing Activities (Makan)

Financing Activities provide shelter to the company in terms of capital, debt equity etc. It details cash flow from both debt and equity financing. The cash flow from financing gives investors insights into how the business itself is funded.

Young businesses will have positive cash flow from financing because they borrow from investors to run their businesses, whereas mature businesses will mostly have negative cash flow under this head.

Understanding all three sections of the cash flow is very essential as it gives a holistic view of the company.

No matter how attractive a company’s profit & loss statement & Balance sheet are, CFS is the Ace of all the statements.

And to make sure that our cash flow is the ace of all the statements, understanding it is very crucial.

But, to make sure you have the money you need to keep your business running, you need to do more than just understand the concept of cash flow; you also need to track your cash flow, examine your financial data (a process known as cash flow analysis), and identify any changes that needs to be made to push your company away from negative cash flows and toward a positive one.

Managing your Cash Flow

To prevent your company from going into the red or starving, you must control its cash flow. Being on top of your income and expenses is one of the two essential components of effective cash flow management.

1. Track your Income

Knowing how much money is entering your business and when is a necessary component of cash flow analysis, which requires tracking your invoices.

When sending an invoice, it's crucial to keep track of when it was issued, when payment is expected, when it was really received, and how much you charged for the month. In this manner, you may determine about how much cash will enter your company each month.

Example: You are reviewing your cash flow for the past few months, and you notice that, without fail there’s one client that pays their X invoice amount at a delay of a month or two. So, even though you’re expecting that X amount to come in at a certain point, it’s actually coming in 30 to 60 days later – which impacts your cash flow.

Now that you are armed with this information, you can adjust your cash flow forecasting and plan for the deficit and ensure that you have enough money to carry out your operations in the coming months.

2. Track your Expenses

When you check your invoices, you can see the money coming into your company – but it’s just as important to see the cash flowing out of your business, which means getting serious about tracking your expenses.

The more organized you are with tracking your expenses, the easier it will be to dig into your cash flows and use those insights to drive your strategy, so make sure to organize your expenses by category.

Example: Your total expenses are Y per month. If you haven’t broken that Y down into categories, it’s hard to know if and where there are any opportunities to lower your expenses—and improve cash flow in the process. But if you break it down into narrow categories, you can gain more insights into opportunities for cost savings.

How to Improve Business Cash Flow

The End Goal after managing your cash flow is, of course, to improve it. But how, exactly, do you do that?

Here are 3 strategies to boost cash flow in your business – and ensure that you have the desired cash in hand to move your business forward.

1. What’s the best thing you can think of to improve your cash inflow? More money, right? Basically, increase your revenue. This could entail increasing your prices, selling more of your goods or services, or having customers buy from you more frequently.
2. The most solid strategy to improve cash flow is to bring in more money but taking steps to mitigate cash outflow is an equally worthy strategy. Look for ways to reduce your monthly expenses. You may have some wiggle room in some areas, such as travel and entertainment, bank fees, or contractors.
3. Be strategic with your invoicing, for example: Your marketing agency sends out invoices on the 30^th of every month with an credit period of 30 days. That means you’ll generally get an influx of cash at the end of the month—so, if possible, you would want to align any major expenses (like debt repayment or big business purchases) to fall around the end of the month.

Cash flow is the lifeblood of your small business. Unfortunately, some small businesses don’t fully understand it until it’s too late, and they no longer have the cash to cover the bills.

Understanding the basics of cash flow—how it impacts your business, how to calculate it using a cash flow statement, and how to improve it—can make or break your business. Armed with this information, you can effectively plan for and anticipate the cash you need to keep your business moving forward.

And now that you know all about it, Don’t Let Cash Flow Kill Your Business.

About Jordensky

At Jordensky we want to ensure that small businesses continue to thrive while we provide them the best inputs using the latest technology and tools.

Jordensky helps you in accounting, taxes, MIS, and CFO services for Startups and growing business and are focused on delivering an experience of unparalleled quality.