Last Updated on March 4, 2023 by Treana Wunsch
Having poor cash flow is the number one reason businesses fail. Especially, businesses with employees. If suddenly, there isn’t enough money in the bank for payroll, there is no business. Not tracking and monitoring your income and expenses monthly can be the sole cause of your business crashing.
In other words, if you’re not keeping up with your bookkeeping, your business has an increased chance of failure. This is why bookkeeping is so important.
For example, if you get behind on your bookkeeping by a few years (I’ve seen it more times than I care to mention), you may have no idea how much you owe to the government. Not only will you end up paying way more in bookkeeping expenses, but you’ll owe late fees and penalties. It’s safe to say that if you aren’t tracking and monitoring your income and expenses, you probably aren’t setting aside money for taxes and fees. If you haven’t been setting money aside, your business could end up owing more than you can afford and you could end up going bankrupt.
If you can’t keep up with the bookkeeping yourself, you must hire someone. This is usually the first hire a business makes (or should make). If you have time and desire to do your own bookkeeping, Quickbooks Online is the best platform I’ve come across and I use it exclusively for myself and my clients.
Let’s find out why you need to track and monitor your business cash flow, shall we?
What is Small Business Cash Flow?
Cash flow is a crucial part of running a successful small business. It can determine whether your business thrives or struggles to make ends meet. But what exactly is cash flow?
Cash flow refers to the movement of money in and out of your business. When the amount of money coming into your business exceeds the amount going out, you have positive cash flow. This means that you have extra funds available for investments, growth, and other needs. Conversely, negative cash flow happens when more money leaves your business than comes in—this can lead to financial instability and difficulty in paying bills on time.
By tracking and managing your cash flow carefully, you can ensure that your small business has the funds it needs to stay afloat.
The Benefits of Positive Cash Flow
Cash flow is one of the most important metrics for small business owners. It indicates whether a business has enough liquid assets to cover day-to-day expenses and pay off debt. Positive cash flow is essential for businesses to thrive, as it ensures that the company can maintain its operations despite fluctuating revenue and costs.
Having positive cash flow is especially beneficial for small businesses because it allows them to reinvest in their growth without having to take on outside sources of financing. This means they can remain independent and retain more of their profits while continuing to expand operations. Positive cash flow also helps businesses build a reliable credit history which makes it easier to obtain funding when needed in the future. Additionally, it creates peace of mind knowing that money isn’t being wasted or handled inefficiently.
The Implications of Negative Cash Flow
Cash flow is key for businesses of all sizes, but especially small businesses. Negative cash flow occurs when a business’s outflow of cash exceeds its inflow, making it difficult to pay off debts and operate day-to-day. It can also have longer-term implications for your business.
The most immediate effect of negative cash flow is that you won’t be able to pay creditors on time or maintain a comfortable level of working capital. This can put an immense strain on your relationships with suppliers and lenders and may even lead to legal action if your debt continues to go unpaid over time. In addition, having too little cash on hand could limit the ability to take advantage of new opportunities that require upfront investments such as hiring additional staff or expanding into new markets.
Cash flow is vitally important to the success of small businesses, and a negative cash flow can have serious implications on the payroll. When a business’s cash account runs dry, it becomes difficult to pay employees their wages or benefits on time. This can lead to unhappy employees and increased turnover rates, which are not only costly but also disruptive to the overall business operations.
Furthermore, if payroll isn’t managed carefully in times of negative cash flow, it could even prompt tax penalties from the government if taxes are withheld late or not at all. It is therefore essential for businesses experiencing negative cash flow to understand how this will affect their payroll and be prepared with solutions for maintaining a secure system. Keeping careful track of expenses and exploring alternative funding options are two ways that businesses can ensure that their payroll remains up-to-date during hard financial times.
How to Improve Cash Flow
That’s why learning how to improve cash flow should be one of the most important tasks for any small business owner. Improving your cash flow involves taking proactive steps such as obtaining financing when needed and streamlining payment processes by adopting more efficient technology solutions. It also requires understanding why a healthy level of cash reserves is so important for running your business efficiently in the long term.
My next article will go into detail on how to improve your small business cash flow.
Limitations of Profit as a Metric
Profit is one of the most commonly used metrics for measuring a company’s success, but it isn’t the only measure that small business owners should use to evaluate their performance. While profit shows what is left after all expenses have been taken out, cash flow can provide a more accurate picture of a company’s financial health. Understanding why cash flow is more important than profit can help small business owners make better decisions and manage their finances more effectively.
The biggest limitation of relying on profit as a primary metric is that it doesn’t take into account any outstanding payments or debts owed by the business. As such, an extremely profitable business could be just one unpaid invoice away from major financial distress – something that might not be reflected in its profits if these payments are yet to be made.
Tracking Your Small Business Performance With Cash Flow
If you’re a small business owner, then tracking your performance is essential for success. Knowing how well your business is doing financially can help you make strategic decisions on how to improve and grow. Cash flow, in particular, is one of the most important metrics to pay attention to. Understanding the difference between cash flow and profit can be key to running a successful business.
Cash flow measures the money that comes into and out of a business over a given period of time. It’s important because it shows whether or not you have enough liquid capital available at any given moment to pay your bills on time or take advantage of new opportunities when they arise. On the other hand, profits measure total revenue minus total expenses over an extended period of time — usually a fiscal year.
The Power of Forecasting and Budgeting
Forecasting and budgeting are two of the most powerful tools in any small business’s arsenal. Managing cash flow is essential to a company’s success, and accurate forecasting and budgeting can go a long way toward making sure that your small business remains on track financially. By predicting how much money you’ll spend and receive each month, you can make sure that your expenses don’t get out of hand while also allowing yourself room to take advantage of potential growth opportunities.
Forecasting involves using past data and current trends to predict where your finances will be in the future. It’s important to take into account all aspects of the financial situation when creating forecasts – including income, expenses, liabilities, assets, taxes, and more. Once these factors are accounted for, an accurate prediction can be made regarding cash flow over time.
Why Cash Flow Matters
Cash flow is an essential element of success for small business owners. It is a valuable resource that can make or break your business’s ability to stay afloat. The conclusion of this article makes it clear that cash flow is far more important than profit when running a small business.
Cash flow allows businesses to pay suppliers, employees, and rent on time, which promotes positive relationships with clients and vendors. A strong cash flow also enables businesses to take advantage of opportunities quickly and react effectively to changes in the market. As such, having enough funds available at all times helps keep the business operating smoothly while planning for future growth.
Without proper cash flow management, businesses may struggle to cover everyday expenses and pay off debts, leading to financial instability over time.
Accounting software such as Quickbooks Online can easily calculate your monthly cash flow. Sign up today and receive 75% off for 3 months.
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Up next later this week…’How to Improve Your Small Business Cash Flow’.