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The Three Most Important Aspects of Small Business Cash Flow

small business cash flowLast week we discussed two very important financial statements. This week, we are going to take a look at an equally valuable statement, cash flow.  Small business cash flow, or the lack of it, is what most often causes a small business to fail. It’s easy to believe that if revenue is up, that your cash level will be, too, but that’s not always what happens.  On your balance sheet, remember that assets equal your liabilities and owner’s equity. As any one balance sheet item changes, another element must change to keep the balance sheet balanced. Remember these basic rules (assuming no other changes occur):

  • In order for cash to increase, some other asset must decrease.
  • Cash levels will decrease if another asset increases, such as inventory or receivables.
  • If your liabilities increase, cash will also increase. If you pay down your debts (liabilities decrease), your cash levels will decrease.

Looking at specific balance sheet items, here are the top three items you must watch to keep your cash position strong:

  1. Inventory. Increased inventory levels may cause a decrease in cash levels or an increase in accounts payable; either way, an increase in inventory that doesn’t turn quickly will cause a decrease in cash.
  2. Accounts Receivable. Increased sales may become an increase in customer balances due you (Accounts Receivable). You’ve paid for inventory or payroll but haven’t yet received cash from your customers, which causes a decrease in cash levels. In a desire to increase sales, be careful not to unusually extend credit; this can cause a cash crunch not easily resolved.

Inventory levels and customer receivables often grow as sales increase; cash levels can decrease quickly if you don’t keep a close eye on them all.

  1. Accounts Payable. Slowing down payments to vendors can help cash in the short term, until vendors demand cash on delivery. You then are paying for new stock without having paid for inventory on hand. Be careful not to build inventory levels for which you don’t have the cash to pay for.

Don’t let this basic financial statement, your Statement of Cash Flow, confuse or overwhelm you. This is basic math: as any asset or liability changes, another item, such as cash, must also change. As revenues increase, watch your inventory, receivables and payables especially and cash will remain strong.

Essentials to Know about Your Small Business Financial Statements

Reading and understanding your small business financial statements is right up there with root canals for many business owners. If you don’t regularly review your financial statements, though, disaster can be right around the corner and you may not even know it.

I’ve wanted to provide a Small Business Financial Statement 101 review for quite a while now, but how do I do it without you nodding off? And besides, the SBA has explained the elements quite well already (see http://www.sba.gov/ombudsman/7046 for detailed descriptions of balance sheet and income statement elements). So instead, let me give you a broad view with quick tips on what you need to be paying attention to. 

Income Statement, or Profit and Loss Statement

If you review any of your financials, chances are this is the one you look at. Basically, this is it:

Revenueexpenses = net income.

small business financial statements

So, where is the starting point for reviewing this statement?  Give every line item a critical review, understanding that if you want to increase net income, one of the other two items – revenue or expenses – must change. You should be looking at it 

monthly, compared to the same month last year and to your budget; also review it on a year-to-date basis (and compared to YTD last year and your YTD budget).

That’s a start, but this limited view has its downfalls. Your income statement is historical and has little to do with a critical small business need: cash.

Balance Sheet

Your balance sheet is a snapshot in time, and shows what you own, what you owe, and what’s left over AT A GIVEN POINT IN TIME. Key items to pay attention to:

  1. Current Assets compared to Current Liabilities. If necessary, could you cover all of your short term liabilities (what you are required to pay within one year) with your short term assets (what you can turn into cash relatively quickly)? Watching this ratio (called your Current Ratio) will prevent excessive debt, which can quickly turn a business into a mess and even non-existence.
  2. Accounts Receivable. Consider accounts that owe you money as your customer loan department. If you have provided a service and have not yet been paid for it, you are basically loaning your cash to others. Make sure the business transactions warrant that “loan”.
  3. Inventory. It’s easy to fall into the trap your distributor reps often set: buying more of an item, giving you a better unit price, is not always a good thing. Inventory is equivalent to dollar bills sitting on your shelf. Make sure inventory will turn quickly enough to provide the income needed to pay bills, provide for you and your staff, and invest further in your business’s long term health.
  4. Accounts Payable/Loans Payable. This represents what is due to vendors and lenders in the short term, keep this balanced between maximizing the “loan” you take from your vendors with too much debt and keeping your vendor relationships strong. Avoid letting this number creep up without increased sales and cash flow.

Financial Success: Small Business Accounting

To most business owners, small business accounting is like eating your veggies; you don’t really enjoy it, however you know it is good for you, and you feel better after it’s done.   It isn’t the most fun or exciting thing to do, so it is easy for the task to but pushed aside for another day.  Small business accounting can be confusing, time-consuming and downright frustrating (isn’t that why you hired a CPA?).  However, it doesn’t have to be as hard or painful as you think!  You can discover a ‘wealth’ of information if you know where to look and how to read the statements.  (Need more help on this topic?  Check back next week for tips and tricks on reading statements)

Let’s start by breaking down what is most important in small business accounting analysis.  Your time is valuable, and in short supply, so let’s focus on the statements that will yield the biggest bang for their buck.  Below is a list of financial statements that I want you to see, and review, regularly:

Must Haves

small business accounting

  • Income Statement, (also called Profit and Loss)
  • Balance Sheet
  • Operations Dashboard

Like to Have

  • Statement of Cash Flow
  • Customer List sorted by Revenue
  • Product/Service Line Profit and Loss by month

Dream List

  • Key Financial Data by Month since Inception, recorded to allow reporting of year over year data (comparing same month, different years)
  • Key Operating Data by Day, to allow comparison of operating data by day of week, by week. What I really want is for you to see your key items sliced in any possible way you can imagine. This requires some up-front thinking and analysis and someone good with a spreadsheet.
  • Key Ratio report showing monthly trend

This list may seem overwhelming at first, but once you get into the groove of reviewing statements, it becomes painless and eye-opening.  Don’t know what to look for when reviewing these statements?  Check back later for the next post detailing more small business accounting tips and how you can use statements to grow, prevent disasters, and increase your cash.

Employee Benefits that your Team Really Wants

Understanding what employees want in benefits can seem like shooting at a moving target; there are more studies and surveys than there are potential employee benefits. These studies have a lot of great information in them but there’s a catch: they didn’t ask your employees. The only way to find out what is most important to your employees is to ask.

SurveyMonkey.com is simple and anonymous for employees to use. The free version allows you to ask up to ten questions with a variety of question formats. If you have few employees, try having an open dialog with employees to prompt in-depth answers; consider asking employees to give you their thoughts in a more free-flowing format. This style is best for discovering benefits that don’t come off the shelf.emlployee benefits

Stop and think about what employees really want, with or without a survey; it comes down to the basic wants that all humans desire – control, to make an impact, and appreciation.

  • Control. Employees want to be in control of their schedule, when they work, where they work, and how and when they can take time off. Open communication allows you to both achieve what you want.

Employees also want to be in control of their approach. This can be a tough one for entrepreneurs to swallow since there is a control-freak lurking somewhere in us. If you hire up (Read more about hiring up: http://avisionofyourown.com/tag/managing-employees-small-business/page/3/), you have hired an expert, someone more skilled at their job than you could be. Why would you try to control how this hired expert completes their tasks? If you’re still skeptical, create a safety net by asking for drafts, agreeing on a timeline, or having the employee explain their approach first. Do this a couple of times, then let them do the job you hired them for.

  • To make an impact. Humans like to contribute, to give, to know that they make a difference. While we generally think of this in philanthropic terms, it’s true in all aspects of our lives including our working lives. Allow your employees to contribute, to use their talents, to feel valuable.
  • Appreciation. Let your team know that you appreciate them; be specific, timely, and usually, do it in public. It can be as simple as a heartfelt thank-you or a handwritten note with tickets to a show or dinner. If you ever received a handwritten note from a boss, I bet you saved it for a long time and may even still have it. Give that same gift to a well-deserving staff member.

Talk to your employees about what is most important to them through a survey, an impromptu conversation, or a scheduled quarterly/semi-annual review. Incorporate these basic human wants – (control, to make an impact, and appreciation) into your organization – and not only will your employees notice, but they will appreciate you more and be motivated to work harder. Happy employees means happy customers, an attractive bottom line, and a less stressful personal life.

Helen Dutton, A Vision of Your Own, has provided business and personal coaching for small business owners since 2000, providing online and face to face coaching for entrepreneurs, small business owners, start-up businesses as well as established businesses across the country. Clients come from New Hampshire, her home state, but she has also acted as a mentor to business owners in Atlanta, Chicago, Los Angeles, the Denver area, and closer to home in the Boston area. Helen helps her clients develop their small business ideas, create marketing plans, improve operation efficiency, build customer service systems, build management and leadership skills, and develop confidence as a business owner. Helen provides business tips and resources through her blog and her newsletter, where you can also find business templates to help your business prosper.