The Secret To Understanding Cash Flow

The Secret To Understanding Cash Flow

When operating a small business, positive cash flow is essential to survival. Many business owners underestimate just how vital managing cash flow is to their business’s success. Your cash flow provides you with a better understanding of your business’s liquidity, flexibility, and overall financial performance. Hiring a part-time CFO will help ensure your small business is on the right track to positive cash flow.

What is Cash Flow Management?

Cash flow forms the basis of financial reporting. In a word, cash flow is the net amount of cash moving into and out of a business at any given time. The keyword here is “time.” Cash flow can only be understood through the lens of a given timeframe. Many businesses track their cash flow on a month-to-month basis

What Does It Mean to Be Cash Flow Positive?

For your small business to operating successfully, you need money in your bank account to purchase inventory, cover expenses, and pay your employees. This money comes from either the money you’ve received from sales and receivables or the working capital that has been invested into your business.

The problem happens when a small business struggles with the timing of expenses relative to sales. Even if the long-term financial trajectory of your business is strong, and you are making more money than you are spending, you can quickly get into hot water with your business cash flow if you run out of cash by spending more in the short-term than you’re bringing in.

Cash Flow Positive vs. Profitability

Many newer business owners hear the term “cash flow positive” and assume it means the same thing as profitability or “breaking even.” However, although the two terms are related, they’re not actually the same thing. A part-time CFO can help your team distinguish the difference but for now, here is a brief explanation:

• Cash flow positive meaning: Cash flow positive means that you have more money going into your business at any given time than you do coming out.

Profitability meaning: Profitability, on the other hand, measures a bigger picture number. Your profit is what you have left after all of your expenses are paid. At the end of the year, did your business make more money than it spent? If so, you’ve turned a profit for that fiscal year—but you might’ve done so even while having several scary bouts of negative cash flow at various points throughout the year.

5 Tips to Ensure Positive Cash Flow

The sooner you learn how to manage your cash flow, the better your chances of survival. Furthermore, you will be able to protect your company’s short-term reputation as well as position it for long-term success. It is essential that even if you hire a part-time CFO, that you, as a small business owner, still understand the cash flow within your business. Here are a few tips that a part-time CFO can assist small business owners within properly managing cash flow:

• Prepare a cash flow forecast. Review this regularly on a daily/ weekly basis and ensure the cash is being managed properly. Don’t forget to factor in regular payments such as payroll taxes, salaries and VAT payments at the correct times. This focuses the business to the critical times of the month when cash (or lack of it!) might be an issue.

• Agree on clear credit terms with your customers. Agree on credit terms at the start and encourage customers to speak to you for payment plans if they are having trouble settling your invoices. Agreeing terms enables you to forecast the cash receipts accurately.

• Invoice on time. The sooner you invoice, the earlier you get paid. Small businesses often make payments once or twice a month. If your invoice ‘misses’ the payment run, you will have to wait for the next payment. This delays the cash inflow into your business. Email invoices rather than send by post. This means the customer gets the invoice faster.

• Make payments easier for your customers. Give bank account details or other online methods of payments they can use.

• Use technology to manage cash flow. Use cloud accounting solutions to view your finances on the move. There are some very good cash flow forecasting solutions that sync in with your cloud accounting software. This means that the data flow automatically reducing the scope for errors.

Outsourced CFO services for Managing Cash Flow

A part-time CFO will ensure your small business is able to meet its financial commitments and manage cash flow in the most efficient way. This group is tasked with managing the company’s cash balance and working capital, such as accounts payable, accounts receivable, and inventory.  Part-time CFOs in Phoenix also carry out the issuing of any debt, managing investments, and handle other liquidity-related decisions.

Limitless Investment and Capital’s Part-Time CFO services in Phoenix 

Limitless Investment & Capital provides growing and established organizations with experienced CFO-level talent on an outsourced, part-time basis at a fraction of the cost of a full-time employee. Our CPAs and consultants provide specialized skill sets to navigate times of transition when you can’t afford to be without a CFO. We price our service offerings very sharply at rapid mandated turnaround times and place exceptional quality CFOs, Financial Controllers, and Analysts on the project, by leveraging on our varied and wide resource database pool. Schedule a FREE financial analysis today!