Understanding Your Cash Flow: What is it and how to manage it
Understanding Cash Flows: What is it and how to manage it...
Do you often wonder where your money has gone, even if your business clearly makes a profit? The answer lies in your cash flow, and how well you manage it.
A recent?survey by Xero?shows that over 90% of small businesses will experience at least one cash flow crunch each year- a negative cash flow month that’s sufficient enough to negatively impact your business.
While it’s not impossible to get back on track after a negative cash flow, this is one of the most common pitfalls small business owners encounter especially when starting up their business. To beat this crunch, let’s discuss what cash flow is, its importance in your business, and how to create a #cashflow statement together with Profit & Loss (P&L) as well as Balance sheet statements.
What is Cash Flow?
At its core, cash flow refers to the movement of money in and out your business. It’s not just about the revenue or the profit you make; it’s about the actual cash that comes into your business and the cash that goes out.
Think of cash flow as the lifeblood of your #business. Why? A healthy cash flow ensures that you have the necessary funds to cover your expenses, invest in your business’ growth, and prepare for unexpected financial problems that may come your way. That includes missed payments, poor cash management that leads to a potential loss of your business and personal assets or worse, could lead you to bankruptcy.
Where Your Money Goes
To gain a better understanding of your cash flow, it’s important to identify where your money goes. Here are the three main activities that impacts your cash flow:
Cash Flow vs Profit & Loss Vs Balance Sheet: What’s the difference?
The Cash Flow statement tracks the inflow and outflow of cash within a specified period. This statement is vital for evaluating liquidity, identifying potential cash flow issues, and making your financial decisions.
Profit and Loss statement, also known as P&L or Income Statement, shows the following over a given period:
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Think of it like a snapshot of your company’s #financialhealth and its ability to generate profits from core operations. P&L allows you to analyse revenue trends, cost structures, expense management, or even formulate your revenue growth strategies.
However, not all expenses might show up on your P&L, such as loan repayments, your ATO payments, so it’s still important that you have both your cash flow statement and balance sheet ready on a regular basis.
Talking about balance sheets, having one will show your business’ financial position at a specific point in time. It allows you to see how much you would have left over if you sold your assets and had all the liabilities settled, which is known as the equity.
As the name suggests, your equity must be balanced with assets and liabilities in this formula:
Equity = Assets – Liabilities
Preparing a Cash Flow Statement
The most common way to prepare a cash flow statement is the indirect method – using Profit & Loss (P&L) and Balance sheet as your starting point, also known as the indirect method.
Maintaining a Good Cash Flow
A healthy cash flow is more than just gaining high profits and revenues. It’s about planning how to prepare for the ups and downs of your business, and here are some tips to maintain a positive flow:
Need help with bookkeeping?
accounts all sorted are Xero Platinum Partners, Registered BAS Agents and would love the opportunity to become your trusted bookkeeping partner by helping you stay on top of your bookkeeping, compliance, maintaining and optimising your cash flow. If you’re a business owner who is overwhelmed and confused about your cashflow and profitability, let’s have a chat and see how we can help or call us on 0409 962 777.