Why understanding your business cash flow will help you grow your business

Business owner entrepreneur reviewing cash flow statement
As a business owner what do you say when you are asked for a cash flow statement? "I will ask my accountant, I will get back to you in two weeks".

Have you heard these statements before, “cash flow is king, cash flow is the life of your business”? What exactly is cash flow and how does it help you grow your business? Learn more in the blog.

What is cash flow?

After reading many definitions of cash flow the simplest definition is, “the flow of cash in and out of your business”.  This is your business income and expenses and more specifically the cash which is moving in and out of your business bank account. Every business has monthly income and expenses, the key to managing business finances is to know exactly how much cash is coming in and going out of your business.  So, the goal of cash flow is to help you as a business owner have an accurate picture all your income and expenses. Business financial records start with your business bank account and your cash flow statement.

How to get started with cash flow?

The best way to start understanding cash flow is to use a cash flow template in your business. This means you taking your income and expenses for each month and reviewing if your business is making a profit or loss at the end of the month. Compare the template with your business bank statements weekly or monthly and check if the numbers match.  If you read the previous blog, you could also use financial management software to check where your cash is flowing in your business. Financial management software has many advantages, your income and expenses are categorized in graphs showing you details of your business finances. This provides you as a business owner with data to make financial decisions accurately.

When do business owners need a cash flow statement?

The business cash flow statement should ideally be reviewed monthly in your business to help you make financial decisions accurately.

Scenarios when you could be requested to provide a cash flow statement or projection:

  • Applying for finance at financial institutions (overdraft, business loan, credit card)
  • Applying for credit with a supplier
  • Selling your business

Cash flow projection

Financial institutions sometimes request a 12-month cash flow projection.  In this case you as a business owner need to show how much cash you expect to receive and payout in your business over the next 12 months. Visit our website resources page to download a free cash flow template to help you get started www.j29.co.za

Why monitoring your cash flow is a powerful tool to help you grow your business?

As business owners we sometimes look for the latest tools and software to make financial decisions in business but overlook how useful the cash flow statement is.  Analysing your business cash flow in Excel or using financial management software will provide you as a business owner with data to help you grow your business and make financial decisions based on facts.

Three months have passed, and you started monitoring your cash flow, lets look at a few examples of information you may find.

  • Income has dropped by R5000 in the second and third month – by using this information you can start investigating why. Did you lose a client? Which client? What was the reason for the client not using your product or services?
  • 2 expenses have increased over the past three months – bank charges have increased by R300 and travelling expenses by R800.

The objective for you as a business owner is to track changes in income and expenditure immediately, by using the cash flow.  The first example, income dropped by R5000 in the second and third month could lead to a loss of a client and income of R60 000 (R5000 x 12) over the next 12months. By using your cash flow statement, you could contact the client and find out how to resolve any problems.

Monitoring your cash flow will ultimately help you increase amount of cash you have available in your business. Keeping your cash flow positive prevents making business loans which include interest and can be avoided in some cases. Reviewing your cash flow is a commitment every business owner should make to ensure you manage your business finances like a pro. To take your business to the next level make sure you know your numbers and keep your cash flow positive.  Automation using financial management software is the easiest way to review you cash flow daily, this can even be done on your mobile phone depending on the software you choose to use.

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