You’ve probably heard the saying before that in business “cash is king”. This business cliche’ depicts the importance of cash to any business regardless of the size. In fact, cash flow is the lifeblood of any organization and without it your business cannot survive. The word flow indicates the fluidity of cash. Where it’s coming from and where it’s going? Take for example that you need to pay a supplier, pay employees, purchase supplies…how are you going to pay for it? Better yet, how would you know that you have the money on hand to satisfy your end of the bargain? Well, the cash flow statement (is the “C” in the BIC+B group of financial statements) is the document that will help to keep your finger on the pulse of your organization.
As mentioned in a previous article, cash flow is the movement of money in and out of your business. Creating and reviewing a cash flow report on a regular basis will help you stay abreast on the cash that comes in and goes out of your enterprise for any given time period. It also helps to shed light on the timing of money flowing into and out of your business. Remember in an another article where I mentioned a quick tip about cash vs. profit? Many entrepreneurs or small business owners wonder why their business may show a profit, but there’s no cash in the bank. The cash flow statement can help provide those answers, by showing where your money is going.
Here are a few things to know about the cash flow statement:
While there may be differences in the way some create or show their cash flow the fundamentals are usually the same across all enterprises.
1.) This statement usually starts with the profit or loss for any time period (day, week, month, year, etc.).
2.) This statement depicts how cash in your business was generated or created (inflows) and how it was spent or used (outflows).
3.) There are 3 components to the cash flow statement: Operating activities (normal business activities), financing activities (assets purchased or sold for your business), and investing activities (financing of debt or equity or debt repayment).
As a solopreneur or entrepreneur, this may seem like a lot of information to take in. Or, it may seem like it’s way too difficult to do. Let me assure you that it’s not. You can start where you are and make it as simple as possible.
I recommend that as a new entrepreneur you review your cash report on a daily basis starting off and then move to a weekly basis format. More seasoned entrepreneurs or larger small businesses typically review cash flow statements on a monthly basis.
Get In The Know Tip: When you want to know what cash your business has on hand, start with looking at your business’s checking account.
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