Yes, your bottom line is important but there is another business metric that is just as if not more important than your business’s bottom line.
So many business owners associate the financial health of their business with their bottom line or net income. While it is important to know what your company’s net income is, knowing if your business is flowing positive or negative cash flow each month is just as important if not more.
What is cash flow and why is it important? Cash flow is defined as the total amount of money being transferred into and out of a business. Knowing what your company’s cash flow is important because you want to know if you have more cash coming in than going out. Why? Because if you have the reverse, more cash going out than coming in, you are going to have a big problem on your hands really quickly. Luckily, in today’s day and age we have fancy accounting software that helps break down what our monthly cash flow is. If you go over to the section of your accounting software and select “Statement of Cash Flows” and look towards the bottom, you should see something similar to “Net change in cash” if that number is positive that is a good thing. If the number is negative and it has been for an extended period of time, you might want to take a look at where your business is spending cash and/or if it is possible to increase your sales.
What can you do if you have negative cash flow? First, look at your cash from operating expenses. Here expenses for things such as salaries, purchases, and rent are allocated. Ask yourself, is there anything you can do as a business owner to adjust these expenses? Next, look at the cash from investing activities section. This section looks at the cash inflows and outflows from sale and purchases of long term assets; think a large piece of machinery with a long useful life or a vehicle. Do you need to buy the newest piece of machinery or can you buy it used? Finally, look at the Financing activities section. In the event that you have a business that has multiple shareholders or you pay dividends, this is something that will affect cash flow. Does the dividend to investors need to be decreased? Are the stockholders of the company taking too much out as a salary? All of these things affect your cash flow in a business and it is important to be cognizant of where your business stands so you can ensure your business continues to be a success.
Would you like a free in-depth analysis of your cash flow statement with us? send us an email at firstname.lastname@example.org and we’ll be happy to help.