What is Cash Flow?
Cash Management Best Practices
Don’t Tie Up All of Your Money in Inventory
One of the biggest mistakes product-based businesses make is that they tie up their money in too much inventory or inventory that is outdated. Practice the “Just-in-time” inventory method for products that are readily available from your vendors so you can place smaller, more frequent orders instead of one huge shipment that wipes out your cash. Use WorkingPoint to keep on top of your current quantities and your inventory valuation (the total value of your inventory): you’ll keep your cash longer and you won’t be locked into selling something that just went out of style.
Keep on Top of Your Collections
Another big mistake small businesses make is not following up on customers who have fallen behind in payments. Keep your cash flowing in by keeping on top of your customers’ overdue invoices. Monitor the “Who’s Overdue?” dashboard widget weekly, then send those customers friendly reminders of their account status from their WorkingPoint contact screen. It’s a non-emotional way to nudge your customers to pay.
Keep Good Relationships with Lenders, Bankers and Creditors
If you are in business long enough, you’ll find that even the most successful businesses need to borrow cash at one point or another – whether it is due to tough economic times or for an expansion into a brighter future. Your relationships with lenders, your bankers and your creditors are critical to getting that loan that keeps you in business or helps you grow. If you bank locally, take in your deposits personally and make an effort to get to know your personal banker. Investors rely on references when deciding who to get into business with so protect your reputation by practicing good business habits, in dealing with your customers, your vendors, and your community. And pay your bills on time so your accounts are in good standing: you’ll protect your credit and you’ll be the kind of business creditors will want to lend to. Review your business’s financial statements like your Balance Sheet, Income Statement and Cash Flow Statement periodically because all lenders will want to see your financial statements.
What is Cash Management and Why is it Important?
Cash management, simply stated, is the management of cash in and out of your business.
So, What is Cash?
Cash is money, mullah, dough, scratch&mdashwhat you have in your bank account. It is not inventory. It is not equipment (though you could sell those for cash, they are not, in fact, cash). Cash is the total of your checking, savings, and petty cash accounts—what you can withdraw from the bank and use to pay for things today.
What is Cash Flow?
Cash flow considers only the money moving in and out of the business over a given period. A business that invoices a customer has revenue, but until they receive payment, they don’t have cash inflow. A business that receives a bill has incurred an expense, but until it’s paid, there is no cash outflow. Cash flow analysis is not concerned with revenues and expenses, only cash in and cash out. Cash flow is arguably the best indicator of the health of a business.
Profit vs. Cash
Profit is not the same as cash. Profit is actually easier to predict. By comparing periods and averaging activity using the Income statement, you can pretty closely spot trends in what you sell and what you spend so you can estimate what you will likely earn or spend in the future because Revenue – Expenses = Profit. But cash is different than profit. You can be running a profitable business according to the books but struggle with cash flow. For example, your Income statement says your profit for the month is $3000.00 but your bank accounts say you have $300.00.
Seems crazy, right? But profit is an accounting term and doesn’t have a direct correlation to cash. Showing profitability but struggling to pay bills can happen to any business. In fact, managing cash is one of the biggest challenges for small business. Business owners want to always have enough to pay their employees, vendors and creditors. The key to accomplishing that is cash management.
How Do I Manage My Cash in WorkingPoint?
Good cash management is simple with WorkingPoint. Dashboard widgets and reports help you gain clear insight into your financial position by knowing when, where and how your cash needs will occur so you are ready.
Who Do I Owe?
The “Who Do I Owe?” widget shows you the top bills according to what is due next (including overdue bills) so you can see which bills need to paid soonest and plan when you are going to pay them.
Who’s Overdue?
The “Who’s Overdue?” dashboard widget helps you keep on top of customers who are past due so you can take action to collect the money your owed. WorkingPoint will show you who is past due, by how many days they have past the due date and the amount that they owe. Checking this widget will help you remember to send a friendly reminder to your overdue customers to send in their payments.
The Daily Operating Report
The Daily Operating Report gives you a look into your cash & sales activities for the current day & month. Your cash activities include the money you spent for the current day and month (Cash Out) and the money you deposited to your accounts for the current day and month (Cash In) and the sum of all of your bank accounts (Available Cash).
A look at your day’s activities wouldn’t be complete without looking at your total Accounts Receivable (AR Balance Due) and your current Accounts Payable balance so you can see the amount you owe your vendors (AP Balance Owed).
The Cash Flow Statement
WorkingPoint helps you see how your activities have actually affected your money through the most commonly used cash flow analysis report, the Cash Flow Statement. By converting the Balance Sheet and Income Statement activities from accrual to cash-basis, the Cash Flow Statement reports the inflow and outflow of your cash during a specific time. It’s where to go when you want to check to be sure you are bringing in more money than you are spending. It is also helps creditors feel confident that you’ll be able to pay back loans.