Knowing the cash flow to run a small business is the most important thing, especially when you are just starting out. One of the most important things you can do for your business is to do a cash flow analysis on your finances. So ... Why is cash flow analysis so important? Cash flow analysis simply means looking at the inflow of money and the flow of money in your business. By having a detailed analysis of all your financial transactions, you will know exactly how much money should be in the bank.
If you don't keep track of your cash flow, you run the risk of being taken advantage of. Employees could steal supplies and you wouldn't know it. The prices of the merchandise could increase without your knowledge and this would really affect your budget. For example, if your employee is paid 20% more than the industry average, you may end up putting your company out of balance. While this is a generous move, it is not sustainable when you are just starting a business. This discrepancy undoubtedly ends up hurting your cash flow and your ability to successfully finance your small business.
Cash Flow - Common Mistakes Small Business Owners Make
- When small business owners don't feel they have the expertise to manage their finances, they let their accountant do everything. This blind trust could lead to fraud or theft problems. If your small business finances are handled by an accountant, double check everything they do. You don't have to be a tax guru to see if something doesn't look right.
- When small business owners don't keep physical copies and records. You should keep copies of everything in a safe place for future and safe reference. If you don't keep copies of your tax returns, you could be ignoring the money you owe. This is why the state tax collector may place a lien on your business that could seriously damage your chances of obtaining a loan.
- When small business owners try to tackle payroll on their own. Payroll is going to be the biggest expense of any business. Payroll also carries a high potential for tax errors . Investing in someone to manage payroll will pay off.
- When small business owners extend credit to customers. If you extend credit to your customers, you run the risk that they will not pay what they owe. Also, providing a service or product before payment hurts your cash flow because you rely on that payment to run your business. In case it is a small business of one person, you can apply for the loans without a paycheck, which will help you have fresh capital.
- When small business owners take on the automatic transformation of inventory into cash. When you buy a new machine or order a new merchandise, it doesn't instantly turn into profit. Many small business owners mistakenly overestimate how soon the products will sell or how soon they will see an increase in sales.
- When small business owners, especially new immigrants, misreport their taxes. Because you don't want to pay a lot in taxes, you may be tempted to report less profit or report excess loss. This is a bad idea because it will affect your chances of obtaining outside financing and could lead to problems with the state tax collector. It is best to work with a tax specialist to minimize your tax liability.
Tips for managing cash flow
Some tips that could help you better manage your company's cash flow can be cited like this:
- Start with creating a profit and loss statement. Just check your company's account status. On a spreadsheet or with your accountant, document all financial transactions, including rents, utilities, payroll, supplies, interest on immediate loans , insurance, and sales. Keep copies of all these bills.
- Keep all your documentation organized, such as invoices, tax returns, receipts, etc. The first thing lenders ask for is documentation. It often happens that many small business owners don't know their monthly sales average and would have to look it up.
- Always save some of your winnings. Do not reinvest everything, because you will need emergency funds. We recommend reserves that can support all your expenses for at least six months. You may need more protection if your business industry is seasonal.
- Companies that provide accounting and auditing services are a great ally when it is required to do a cash flow analysis. These companies aim to help small business owners make better financial decisions and even advise you on getting the right loans to help your business prosper.