Understanding your business finances is the key to managing your business properly. Business cash flow dictates business operations. You should have sufficient balance to pay your obligations such as wages, taxes and suppliers, while ensuring that a good amount comes into your business for a positive income.
The amount of money coming in and out can make or break a business. In this article, we'll talk about the difference between cash inflow and outflow and tips to help manage them to maintain positive overall financial health.
The net amount of money entering and leaving your business is known as cash flow. It disregards the funds in your bank account and credit from suppliers. Cash flow also does not count the money that other businesses owe you. Cash flow is plainly the cash coming and leaving your business in a certain period: weekly, monthly, quarterly or annually.
Understanding business cash flow is crucial. It lets you see if you have enough resources to pay for your business operations—like rent, supplies, employee wages, and other operational costs. Business cash flow also helps your business grow. Investors and banks use cash flow statements to assess your overall financial health and see if you can be eligible for loans and investments.
There are three ways that money enters and leaves your company. To help you better comprehend each of them, let's look at each one in more detail.
Operating Activities
Operating cash flow is money that comes in and out of your business through basic business operations such as creating sales or providing services. Inflow from operating activities is the net income you make from selling your products or service, inventory and accounts receivable.
Cash outflow is related to operating activities where you spend resources on the cost of production, rent, marketing and advertising efforts, taxes, and employee salary.
Investing Activities
The money that passes throughout your business as a result of the company's investment is known as cash flow from investing activities. A company can have short-term or long-term investments. For example, getting government-issued bonds like bills and floating-rate notes are short-term investments.
Buying new equipment or purchasing a building to house your business is a long-term investment for businesses. The money you used to buy these investments is considered outflow. Cash outflow is more common in investing activities.
Financing Activities
Cash flow from financing activities include stock sales, loans, dividend payments, and long-term debt payments. Cash inflow in this category is the money you receive when you apply for loans and the ones you generate from selling stock and equity.
Cash outflow in financing activities is money you use to repay the principal amount of existing debts and dividend payments.
Cash inflow is the money coming into your business. Simply put, cash inflow is all the money that goes into your business, whether from investments or selling your products and services. When the cash inflow for your company exceeds the cash outflow, you have a positive cash flow.
A positive cash flow guarantees that business operations can run smoothly and without problems. It is a good indication that you have enough resources to keep your business operations running, and that you can allocate some of them toward business growth.
Cash outflow is the money moving out of your business. The money you use to pay for your business to continue operating is outflow. Rent, wages, operating costs, buying inventory, and interest payments for the loans you borrow are all outflows.
Startups and new businesses may experience more cash outflow in the beginning. Since all their resources are used to launch the business, more outflow is expected. However, once you start selling, you can break even and generate more cash inflow.
When you have been running your business for quite some time, and your cash outflow is still greater than the inflow, it is an indication of negative cash flow. This can be the start of the downfall of your business.
But it's not too late! We have some tips to help your business generate positive cash flow.
It's always good for a business to take on long-term projects with big payouts. But when a project is spread over a long period of time, the more difficult it is to pay bills to enable the project to continue.
Ask for a deposit and establish milestones to avoid burning out your resources. The initial deposits will help you buy the materials you need, and the milestones will allow your clients to see your progress and keep cash flow consistent.
One way to keep a positive cash flow is to increase your prices. If you're worried you'll lose clients with a price increase, you can experiment with it. For example, you can sell products for higher prices to new customers and retain the price for your returning and loyal customers.
You can also increase the price for some of your products and retain the original price for others so your customers won't be perplexed by the price changes while you keep a positive cash flow.
Sales and revenue are just one part of a business's cash flow. You can keep a positive cash flow by controlling your expenses. Negotiating with suppliers can be advantageous to business owners. For example, bulk ordering supplies can give you discounts.
You can enjoy free or discounted shipping rates if you order from suppliers in your locality. Negotiating with suppliers can lessen your expenses, equating to an improved and positive cash flow.
Many business owners think that investing in technology is an unnecessary expense. Technology is advancing rapidly, and some are designed to reduce production costs. There are pieces of machinery that can do what humans do. Technology can do tasks faster and more efficiently which means you can hire fewer people—saving your payment on wages and other expenses.
Look for technology that will make your production more efficient. However, always consider its price. If you're buying a piece of equipment, ensure you have enough resources to purchase it, and that it will not affect any of your business operations.
Now that you are aware of how vital business cash flow is, managing it properly should be on top of your list. If you're new to the business and are still confused about how cash flow works, Unloop is here to help you.
Unloop offers professional ecommerce accounting services, and organized bookkeeping is the key to getting an overview of your business cash flow status. Our bookkeeping services include:
Cash flow is just one part of running a business, and we hope this blog post gives you a better understanding of your finances. For more professional accounting help, book a call and work with Unloop today!
Unloop is the first and only accounting firm exclusively servicing ecommerce and inventory businesses in the US and Canada. With the power of people and technology, our team dives deep into COGS and inventory accounting. You are paired with a dedicated bookkeeping team that prepares accurate financial statements, financial forecasts, and can also pay bills or run payroll for you. Come tax time, everything is organized and ready to go, so you don't need to worry. Book a call with an ecommerce accountant today to learn more.