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What’s Your Company’s Cash Flow?

Feb 4, 2020

Business growth requires investment. But how do you know how much you can afford to spend at any given time? Without an accurate and up-to-date cash flow report, you’re really just guessing. So when opportunities arise — say, a deal on a new truck — you’re making important business decisions without all the facts.

The thing about cash is that it flows in two directions. Business owners are usually very aware of how much cash flows into the business, but they often aren’t as attuned to how much is flowing out of the business. After all, most of us don’t keep a running total in our heads of all our fixed and variable expenses. And unfortunately, our “gut” isn’t as accurate as we would like to think.

For example, you probably know how much you pay employees and any subcontractors you work with regularly, and maybe your monthly rent. But what about utilities? Loan payments and bank fees? Dividend payments? Marketing expenses? And, of course, there are monthly and quarterly tax payments.

Too many businesses run out of cash, even though sales are increasing. That’s why the cash flow statement is such a critical business tool.

Cash Flow Statement: A Gauge of Business Health

The cash flow statement shows business owners exactly where money flowed into the business and where it flowed out during a given period.

A cash flow report tracks both income (such as sales of products and services, tax refunds and rebates, investment returns, grants, royalties, franchise fees, and sales of assets) and expenses (such as material production costs, salaries, benefits, utilities, rent, marketing, taxes, and bank fees). A timely report on cash flows based on accurate data gives a more complete picture of the business’s ability to make investments or take on new debt.

A single month with negative cash flow is not necessarily a cause for alarm. For example, your business might have invested in new equipment or added a key employee that month. But those investments should start to pay off within a reasonable time.

A consistent negative cash flow trend over several months means it’s time to reevaluate your business strategy. Are you putting those investments to good use? Maybe you invested in the wrong equipment that’s not providing the expected productivity returns. Perhaps the new employee needs additional training or marketing support.

Timely, Accurate Data Powers Business Insight

Looking backward is only valuable if it helps you move forward. Business owners should evaluate cash flow weekly to ensure the company is on track to meet its annual growth goals.

To gain this timely, accurate view of cash flow, you need to record transactions (sales, cash receipts, accounts payable, and bills paid) as they occur. Many of today’s accounting packages sync with financial institutions’ feeds so that when a transaction hits your account, it is automatically posted to the proper account. When that accurate transaction record is available on demand, generating a cash flow report becomes as simple as pushing a button.

Use insights gained from this regular evaluation to make better use of your company’s cash. Have you been pulling all the capital out of the business for fixed assets — perhaps in pursuit of a tax benefit — when that cash could have been put to better use on a new marketing campaign to drive demand for your product?

Owners today have unprecedented access to information and insights about their businesses. Contact CRI for help putting systems and processes in place to generate an accurate, up-to-date picture of your company’s cash flow.

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