Cash flow in your business is like the waves of an ocean, with revenue washing in and payments for expenses flowing out. A picture of cash flow is not easy to capture because the ebb and flow of money in your business is constantly changing. Still, you need a handle on your cash flow so you can discern trends in cash management and keep your company solvent.
Importance of the Cash Flow Statement
A company may have revenues and appear profitable, but slow collections of invoiced sales can impede its ability to meet its current financial obligations. Delinquencies in payments to employees, vendors and other creditors can grow to the point of putting the company out of business. To get a picture of your cash flow over a specified period of time, create a cash flow statement.
A look back over a specific period of time (typically a quarter) enables you to look forward for the next period to ensure you have the funds on hand to pay your bills.
Creating a Picture of Cash Flow
The cash flow statement shows changes in your cash on hand, it should reflect the activities of your business.
Most small businesses need to show all of their operating activities: Inflow from operating activities includes revenue from selling products and/or services, interest and dividends that the business receives, and other cash receipts. Outflow from operating activities includes payroll costs (i.e. wages, benefits and employment taxes), payments to suppliers and vendors, overhead costs (i.e. rent, utilities, insurance, etc.), income taxes and other taxes of the business, and other operations-related cash payments.
This method simple but often overlooked process will track specific actions of inflows and outflows from operating activities. Essentially, this method merely subtracts money spent from money received.
Quickbooks software has the information needed to automatically generate a general direct cash flow statement without the need to input each item of income or expense from your business activities.
Reviewing and Projecting Cash Flow
Looking back over the quarter is helpful in knowing where your money went and seeing trends in your business activities. Just as important is looking ahead to make sure you’ll have the funds on hand to meet upcoming obligations. What are your upcoming expenses? What do you project your future revenue to be? Again, look ahead for a specific period, such as the next quarter or the next year, and use the information in your books to generate your projections.
The projections help you decide actions to take, such as cutting expenses if too much money is going out compared with revenue coming in, or seeking a short-term infusion of capital if cash on hand isn’t enough to pay upcoming bills. Once again, it’s up to you to monitor your projections and review your business activities so you can make adjustments accordingly.
Cash is essential for keeping your company afloat. The only way for your cash flow statement to be accurate and worth reviewing is by having all of your data in Quickbooks on a regular basis.
Quickbooks can generate a cash flow statement for you. JRK can create a more detailed cash flow statement (some require this weekly) that is custom tailored to your business/organizations needs.