How small-business owners can effectively manage cash flow

Managing business cash flow affects business functionality and profitability because cash flow is the use of and movement of cash in and out of a business. Too much cash in one aspect of a business can adversely affect another aspect of a business and the inverse relation holds true as well i.e. too little cash in operations can lead to costly debt and lower net gains after return on investment.

Cash flow management can be tackled by dealing with several parts of the business by optimizing the cash flow for profitability in each of those parts. For example, business loans refinanced at lower rates optimize outflow by reducing interest costs. The goal of cash flow analysis is ideally to allow adequate availability of cash for business activities, in addition to helping maximize profit margin and/or net income after costs, taxes, depreciation, expenses and dividends if any.

The three major areas on the cash flow statement include operating, investing and financing activities. Small business cash flow always has operating cash flow and may have some form of investing and financing activities, but the amount of the latter two depend on the size the business.

• Operating cash flow

Operating cash flow should generally be positive due to steady or increasing accounts receivables, net income, and depreciation expensing of property. Cash flow notes may also increase the final operating cash flow number however an increase in operating cash flow because of liabilities may not always be a good thing.

• Cash flow from investing

A second area of cash flow is investing. This aspect of cash flow should generally be negative as cash not invested via capital expenditure in fixed assets or investments in equity ownership is cash that is potentially not growing as much as it could. Investing cash flow may also vary depending on the economic, and business cycles, in which case the cash flow may be strategically lower.

• Financing cash flow

If a company makes use of equity and/or cash flow loans, cash flow can be negative or positive depending on whether shares have been sold or debt paid off. Generally, the business development plans will determine if a business needs to pay off or expand its financing in a given fiscal quarter or year. For example, for companies seeking to expand and develop new projects the cash flow may be positive through debt or equity financing. However, if a new project has been completed and is now returning a profit, it may be a good time to pay off some or all of the financing for it.

• Tips for improving cash flow

Asset management can aid in lowering interest payments, accounting for maximum tax benefits and obtaining cheap or affordable financing. Lowering credit costs, reliance on lines of credit, and write offs benefits cash flow. Inversely, increasing accounts receivable terms and penalties may serve a similar affect. Risk management incorporates cash flow need forecasts in business down times, seasonal and economic cycles helping the business run smoothly. Keeping an eye on costs, business credibility, liquidity and profitability ratios can assist in the cash flow analysis process.

Cash flow management is an continuing process that is either subject to the scrutiny of private, public or individual ownership. Regardless of who owns a company, the goal of business functionality and profitability is facilitated by effective cash flow management. Through an optimization of the operating, financing and investing activities in addition to keen asset, and risk management, the cash flow of a business can not only assist with annual goals but may also aid in demonstrating management expertise to any potential investors, vendors, venture capitalists or banks.