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Quick Small Business Guide to Cash Flow Analysis

Posted by MB Group on Dec 6, 2021 9:36:00 AM

No matter your industry or segment, cash is king. However, this king must be managed through a process of cash flow analysis. Very simply, cash flow is the movement of money in and out of your business. Your cash flow cycle is one of the sole determinants of your success or failure.

According to research by Jessie Hagen of U.S. Bank, a staggering 82% of business failures are due to poor management of cash flow. Because of this, it makes dollars and sense to keep a strong handle on your cash flow via cash flow analysis. Let's take a closer look at the cash flow analysis as well as tangible steps you can take to improve this key performance indicator (KPI).

The Art and Science of Cash Flowcash drawer with money inside Analysis 

As we previously mentioned, cash flow analysis is the study of the movement of money in and out of your business. The cash flow analysis determines your business working capital, which is the amount of money available to complete transactions and run business operations. In the most simple sense, it's calculated as your current assets (near-cash assets or cash assets) minus current liabilities (those due at the end of a period). The analysis of your working capital offers a quick snapshot of the liquidity of your business. To perform the cash flow analysis, you must first prepare three key statements:

  1. Operating cash flow statement
  2. Investing cash flow statement
  3. Financing cash flow statement 

Got Cash Flow Problems? Quick Tips to Improve Cash Flow

Sometimes cash flow problems are the result of bad bookkeeping practices. For example, most freelancers and self-employed contractors are far too busy with their day-to-day work to manage and keep books up to date. These same professionals are more likely to fall behind in collecting payments from customers as well as paying bills on time. Because of this, savvy business owners partner with the experienced accountants of the MB Group for professional cash flow analysis and management. Here are a few simple, actionable tips you can use to improve your cash flow.

Encourage Customers to Pay Promptly

Based on data from the accounting platform Xero, the average accounts payable is satisfied two weeks late. As such, one of the first steps to improving your cash flow is to be proactive about getting paid. Start a system that prompts customers to pay their invoice on time, such as automatic reminders at a specific time period. You can also offer marginal discounts for early payment. And in the event you don't receive your payment in a timely manner, don't hesitate to reach out with a phone call or a personal note. 

Understand Your Cash Flow Cycle 

When it comes to performing a cash flow analysis, your cash flow cycle is imperative. The cash flow cycle represents the amount of time it takes you to buy raw materials, create a product, sell the product, and collect the payment from a customer. And the first step in understanding your cash flow cycle is to always be able to answer the following two questions:

  1. Where did your business's cash go last month?
  2. What's going to happen to your business's cash this month?

However, these questions can only be answered by keeping your profit and loss statements as well as your balance sheet up to date. You should also review these two foundational reports regularly. After you understand your cash flow, you will be in a better position to spot inconsistencies and opportunities for improvement. 

Ask and You May Receive

As the old adage goes, "a closed mouth doesn't get fed." In other words, negotiation can be an immensely powerful tool, especially when it comes to a healthy cash flow for your business. Once you understand your cash flow, you can look for opportunities to negotiate with your accounts receivables and payables. For instance, if a customer makes a large purchase, you can always ask for more prompt payment. On the other hand, if you know it will take you several weeks to turn raw materials into a sale, ask your vendor for more favorable payment terms to optimize your cash flow. The moral of the story is not to be afraid to ask for what you want. 

3-Dec-02-2021-03-23-26-28-PMConsider Financing Your Invoices

When all other methods fail, consider financing your invoices. Accounts receivable financing or invoice financing involves a company advancing you a part of or the total amount of your outstanding invoices. In turn, you will repay this amount as well as interest. This should, however, be one of your last resorts because invoice financing rates can be hefty.

Open a Line of Credit or Cash Flow Loan

Another option to improve cash flows is to have an established line of credit or get a loan. Your line of credit can be used to help your business smoothly make it through the ebbs in cash flows. However, you shouldn't rely on the cash flow loan or line of credit for regular, recurring expenses, such as payroll and rent. Instead, it's best to reserve the line of credit or cash flow loan for expenses that will help drive business revenue, such as new equipment. And before you decide on any alternative financing method, you should always compare interest rates for the best deal. 

Contact MB Group for Cash Flow Analysis

As a small business owner, you have a lot on your plate. And accurately performing cash flow analysis and managing cash flows may not be at the top of your list. Fortunately, you're not alone. The CPAs and bookkeepers at the MB Group offer decades of experience helping business owners across all sectors improve cash flows. 

Contact us today to learn more about how we can help. 

Topics: Small Business, Cash Flow

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