Cash Flow: Small Business Capitalization & Outside Sources of Revenue

Cash flow is essential to any business, but small businesses particularly suffer from the lack of fund coming in. When you are looking to expand, you will likely need outside capital to ensure that you can grow. But you need to be careful with doing so, you don’t want to get sucked into the cycle of debt and repayment. Managing cash flow is a very important part of being an entrepreneur, but you have to learn how to successfully keep track and monitor cash flow operations. While looking for outside sources of revenue can really help when you need the cash, it won’t solve all your problems. Your business model needs to have a sustainable method for keeping cash flowing into the business as money leaves it. To master cash flow, you have to understand it. So let’s start with the basics.

Cash Flow: Accounts Payable & Accounts Receivable

Defining cash flow is simple, but making sure that you have it is another thing entirely. Simply put, cash flow represents the movement of money in and out of the business, but it can be easier to think about it this way. Cash flow represents all transactions in your bank account, meaning that if you have enough money to cover your bills you have positive cash flow. However, when cash is flowing out but it is exceeding the money coming in, that’s when you have a cash flow issue. 

A liability account that tracks the money leaving the business is accounts payable, this may include payroll, bank loans, or other business expenses. Accounts receivable is an asset account that keeps track of money going into the business, such as money you receive from customers from the goods and services you provide. When you subtract the total accounts payable from the accounts receivable, you will be able to see if you have a positive or negative cash flow. 

Profit vs. Cash Flow

Cash flow only represents the balance of your accounts, it is possible for your business to turn a profit and still have no cash. You may earn a profit but still have negative cash flow. The rest of your money is pending in accounts receivables. That’s why profit and cash flow are not interchangeable. 

Why Cash Flow is Imperative

Cash is like the blood of your business, you need it flowing through to keep your business moving. Flow of cash is what makes your business move, and it is just as important as having cash on hand at al. It’s easier to pay your expenses when you have cash. This is especially true for start-ups and small businesses. If you are starting a business, you need money to invest. If you have a seasonal business, you will need money during the off season. To fund expenses, you will need capital leftover. So what can you do to increase cash flow?

Cash Flow Statements

You should put together a cash flow statement that includes transactions, including both income and expenses. This generally includes cash from operations, funds from financing, and money from investing. Most accounting software has reports for cash flow, including how much cash you will have during certain periods. This is always needed, after all expenses are larger during certain times. 

Forecasting Expenses

Identifying periods that you will need extra cash is another key step to helping the flow of cash overall. Estimating operational costs for these months, you can consider your rent, payroll, and other recurring expenses to see how much you will have on hand and what you need during that time. Planning ahead is key, it will save you a lot of time and stress. 

Outside Revenue

When you just don’t have enough money, you will need to find outside revenue. According to MoneyPug, the site used to compare payday loans, this can be in a variety of ways. Prepaid cards can help you plan for the future, but you may also need to use other forms of funding. For example, crowdfunding has become increasingly popular in the internet age. Cash back credit allows you to gain cash flow from spending, and, finally, you could apply for loans. Ideally you would have enough investment to keep moving along, but all know that’s not always the case.

When you are short of cash, the impulse may be to stop promoting and spending money on marketing. This is not usually the right choice. Instead there are many things you can do restructure your spending and open up cash flow. Plan ahead, understand spending, and revisit the invoice process, and you will be able to free up cash in no time.

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April 19, 2023