Cash flow: Why it's important and how to track it
It should be no surprise to any entrepreneur that cash flow is the lifeblood of any business. For small businesses, this is especially true, as not having enough money in the bank can be the difference between success and bankruptcy. That's why small business owners must track their cash flow carefully, stay on top of their finances, and ensure their business remains healthy.
Understanding what it means is the first step towards effectively tracking your cash flow. Cash flow refers to the total amount of money coming in and out of your business over a given time period. Knowing how much money is going in (revenue) and going out (expenses) will help you determine how much profit you make and will give you an idea of where your business stands financially. As a business, you obviously want to make more money than you are spending.
Once you understand the basics of cash flow, it's time to start tracking it. Tracking your small business's cash flow doesn't have to be complicated when you use a tool like Thriday. Whilst there are plenty of tools available such as accounting software or spreadsheets, they all rely on you to do the hard work of importing transaction data and calculating the results. Thriday, on the other hand, does your cash flow calculations automatically and in real time. Thriday will display your projected cash flow position until the end of the financial year. Keeping track of these transactions on Thriday will help you spot any discrepancies early on, which could save you from making costly mistakes down the road.
Here are some of the other benefits of tracking cash flow:
1. Helps to make informed decisions
One of the primary benefits of tracking cash flow is that it helps small business owners make informed decisions. When business owners clearly understand their cash flow, they can decide where to allocate their money to maximise profitability. Additionally, tracking cash flow can help business owners identify and avoid potential financial problems.
2. Facilitates growth
Another benefit of tracking cash flow is that it facilitates growth. When business owners clearly understand their cash flow, they can make strategic decisions about how to reinvest their profits into the business to fuel growth. Additionally, tracking cash flow can help business owners identify expansion and investment opportunities.
3. Improves efficiency
Another benefit of tracking cash flow is that it improves efficiency. When business owners clearly understand their cash flow, they can decide where to cut costs to improve profitability. Additionally, tracking cash flow can help business owners to identify and eliminate wasteful spending.
4. Builds credibility
Another benefit of tracking cash flow is that it builds credibility. When business owners know their current and predicted cash flow, they can provide investors with accurate financial statements that will help them to make informed decisions about whether to invest in the company. Additionally, tracking cash flow shows that the business is being managed responsibly and professionally.
Once you know your cash flow, you should also set up a target to better manage your expenses and ensure that spending stays within reasonable limits. A budget also allows you to allocate funds more efficiently and identify areas where costs can be cut back to maximise profits. Having a clear view of where your money is going each month will allow you to make smarter financial decisions for your small business in the long run. An excellent way to budget is to use a method called Profit First. Profit First encourages you to set a profit target each month, allocate this to an account, and use the remaining funds for your salary, taxes and operating expenses. This way, you are only spending what you can afford.
Managing cash flow is essential for any small business owner who wants their business to thrive over the long haul. By monitoring incoming and outgoing transactions carefully with Thriday or other tools, setting targets, and staying aware of potential discrepancies in spending, small business owners can feel confident that their business finances will remain under control.