Cash flow is the increase or decrease in the amount of money a business, individual, or institution has. In small business, the term is used to describe the amount of cash that is generated or consumed over a particular time period. There are a number of different types of cash flow, each with its own importance when it comes to running a business and performing financial analysis. Here’s a quick primer on cash flow as it pertains to small business. Visit Business Brilliance for more valuable and insightful hacks like this to grow your bottom line.
There are a number of different types of cash flow so it’s important to have a solid grasp of each of them. They include:
Cash from operating activities: This is cash that is generated by a business’s core activities. It doesn’t include cash from investing, for example.
Free cash flow to equity: This represents cash that is available after re-investment back into the business.
Free cash flow to the firm: This is a measure that assumes a business has no debt. It’s commonly used in financial modeling and valuation.
Net change in cash: This is the change in the amount of cash flow from one period to the next.
Cash can come from a number of different sources. At the start, this will come from your capital and/or your business funding sources — i.e., business loans, infusion from investors, and even grants. As you progress, your cash flow will then come from sales. But bear in mind that cash flow does not automatically translate to profit. Essentially, cash flow is your net amount before expenses while profit is what’s left over after.
Cash flow is one of the most important metrics when it comes to finance and accounting in small business. It has numerous uses in both performing financial analysis and in operating a business. The most common uses of cash flow include:
Liquidity: Assessing how effectively a business can meet its short-term financial obligations.
Net present value: Calculating the value of a business.
Internal rate of return: Determining the return an investor makes.
Cash flow yield: Calculating how much cash a business generates per share.
Cash flow per share: Cash from business operating activities divided by the number of outstanding shares.
Cash conversion ratio: The amount of time between paying for inventory and receiving payment from customers.
Funding gap: A measure of how much more cash a company needs to overcome a shortfall.
Dividend payments: Cash flow can be used to pay dividend payments to investors.
Capital expenditures: Funding reinvestment and growth in a business.
There are a number of ways you can protect your business’s cash flow. These include:
Accurate bookkeeping is essential when it comes to protecting your cash flow. Without accurate data, any measurement of your cash flow is going to be incorrect, spelling trouble for your business.
Effective invoicing is key when it comes to a healthy cash flow. It ensures money owed is regularly attained and your overall financial health is kept up.
It might seem easier to lump your business and personal finances together but in truth, it just muddies the waters of your cash flow. This is where forming an LLC can be beneficial. Not only does it keep your business and personal dealings separate, but it also ensures your personal capital isn’t threatened by your business dealings. Leverage a service like ZenBusiness.com to get your company set up right without hefty fees.
A healthy cash flow is essential to the running of a successful business. Now you know a little about cash flow: what it is, how it works, and some tips for keeping your cash flow healthy.
Author: Lance Cody-Valdez