Have you ever been pleasantly surprised by the level of customer service you received? Maybe the representative at a utility company noticed an issue with your service and initiated a solution before you could even voice the problem. Maybe a bank teller upgraded your account without your asking because of your good standing with the bank.
As a small business owner, you can demonstrate similar proactivity in the way you manage your business. One impactful way is through careful tracking and management of the cash that flows within and outside it. Cash flow management has one significant benefit you may not have considered: It positions you and your sales team to be in full control of the sales process. When you proactively manage cash flow, you can avoid reactively taking on customers who do not fit your ideal customer profile simply to bring in revenue to cover unexpected costs.
A good place to start proactive cash flow management is with the cash flow statement. As an accounting tool, the cash flow statement can help you get a solid handle on cash income and outflow before problems arise to ensure you always have ready cash to cover unexpected expenses and emergencies. Here are three ways the cash flow statement can help you proactively manage cash flow in your business and stay in the black.
1. Liquidity and Solvency
How quickly can your business sell an asset with minimal loss of value? How able is the business to meet its long-term debt obligations with its available cash and cash equivalents? These two variables are what lenders and investors scrutinize as they investigate the cash flow statement. The better able your business is to meet its financial obligations and build up cash reserves, the lower the risk it presents. Effective cash flow management also ensures you can easily acquire avenues of financing when needed.
2. Assets, Liabilities and Equity
Unless you know how specific transactions affect the performance of your business, you aren’t going to be able to accurately predict future performance or meet financial goals. When you increase assets without associating them with an expense, you increase your business’ overall worth. Conversely, when you increase your liabilities, your equity decreases. Having an accurate picture of how assets and liabilities impact the value of your business helps you to think strategically and proactively.
3. Future Cash Flows
While not an exact science, forecasting cash flow is essential for ensuring the longevity and solvency of your business. When done daily, forecasting serves as an early warning system that allows you to quickly take necessary action. This ensures you have ready cash to pay team members, suppliers and subcontractors. Forecasting also allows you to identify slow- and non-paying customers, and mitigate cash shortages caused by delinquent payments.
The cash flow statement itemizes and categorizes cash inflows and outflows over an accounting period, and provides a reliable picture of a business’ solvency, its fluctuations in assets and liabilities, and its ability to meet long-term debt obligations. Whether you are seeking a loan to fund the expansion or operation of your business, or whether you simply want to see how much available cash your business has to spend or reinvest, the cash flow statement is indispensable. Now is the perfect time to acquaint—or reacquaint—yourself with one of the most powerful proactive cash management tools available to you.
