Using Business Financial Statements for Cash Flow Management

Because entrepreneurs are not the type of persons who prefer the teacup ride at the amusement park, they should never fear tackling the extreme roller coaster of cash flow management. Understanding business cash flow permits planning ahead with comfort about meeting goals.

Sustainable business success demands capturing new opportunities and undertaking the associated risks. This dynamic is most evident when using cash for expansion or upgrades. Having plenty of cash on hand delivers security. But idle cash doesn’t generate growth. A business will stagnate if cash isn’t deployed for better and bigger operations. The obstacle confronting business owners is assurance that the amount of money available for a mission is sufficient.

Start by assessing business cash flow. Many enterprises have bookkeeping that is “cash basis.” That is, income is only recorded when collected. Counting income when you send an invoice is “accrual basis.” When using cash basis, expenses are those already paid. Accrual basis records expenses when they are billed.

A cash basis profit and loss statement – or P&L – has income and expenses mostly reflecting actual cash flow. Some adjustment is required, however, for cash outlays not on the P&L, such as principal paid on loans or purchases of assets like furniture and equipment. Also, non-cash accounting expenses like depreciation are added to profit when determining cash flow.

Accountants are typically able to create a cash flow statement as one of the components of monthly financial reports. This is especially important for a business with an accrual basis P&L. Accounting software, such as QuickBooks, allows a user to print cash flow statements.

Savvy entrepreneurs look for ways to improve cash flow. They find expense reduction opportunities that will not trigger any productivity drain. Sometimes, business owners cut their own salaries as an avenue to enhance company funds. A wise entrepreneur is willing to reduce his pay for a few months to invest more in his business and become much wealthier next year.

The most valuable calculations of monthly cash flow use an average over several months. This is the amount of money the business generates for solving special problems like equipment breakdowns as well as tackling unforeseen events like shipping problems or a late paying customer. A crucial measure in cash flow management is determining the cash reserve to save each month for those contingencies. Cash flow is also required for debt reduction. Businesses must keep their borrowing power intact for occasions that arise when loans are needed immediately.

Remaining cash flow after accounting for emergencies and loan repayment is available for new goals. The next cash flow management step, therefore, is prioritizing objectives for improving or expanding the business. This entails a process of outlining the costs and benefits expected from each goal. The results identify optimal choices. Armed with the cash flow figures, an entrepreneur determines how many months of operation are required to safely build the funds needed for accomplishing selected aspirations.

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