Updated: Mar 12
Do you know your numbers? Or do you say, "My accountant handles my books?" As a founder or CEO, you have to know your business finances. Knowing your numbers means you know key financial metrics regarding your organization. For example, you know your monthly spend or gross margin. A common missed financial metric is understanding the net cash position. This accounting term explains how much cash is on hand. The net cash position helps you identify the cash inflows and outflows.
A simple cash flow statement will tell you the net cash position. The statement is a financial report that describes the cash incoming and cash spent over a specific time. A crucial reason to generate a cash flow is to determine an organization's ability to pay the bills. Secondly, a cash flow allows you to visualize the timing of the cash coming in. Perform your cash flow every quarter due to its critical importance. If you're an organization that struggles with paying the bills, then use a weekly cash flow.
The Key Elements of a Cash Flow Are:
Net Cash Position = beginning cash balance (actual bank balance) + cash in (inflows, payments made by clients, actual deposits) - cash-out (outflows, bills paid, payroll)
The cash balance, account receivables, and account payables are connected. If customers are not paying, then the organization is not generating cash to pay the bills.
Accounts Receivable Accounts Payable
Amount customer owes you versus the amount you owe your vendors.
There is a misperception that revenue equals cash. Understand that revenue (income) is not the same as cash. Organizations can meet their revenue goal but be cash-strapped. How can that be? If the business is creating invoices, then the accounting system records revenue and creates accounts receivable. There is no exchange of cash during this process.
How do you manage cash flow? Here are a few tips to help you manage your cash flow:
1. Keep an eye on your accounts receivable. Review weekly to verify outstanding invoices. Make sure to invoice quickly.
2. Manage your accounts payables/payroll. If there are bills you cannot pay by the due date, contact the vendor to make arrangements. Extend your payables to net-60 or net-90 if you can.
3. Make it convenient for customers to pay. There are several ways to collect payments, such as ACH, check, credit card, or apps. Before deciding on a method, verify the charges you might incur because this is an expense that will eat into your profit.
4. Keep a cash flow spreadsheet. SCORE has a very straightforward spreadsheet. Update your spreadsheet on a weekly or bi-weekly basis to familiarize yourself with how your organization runs.
5. Build a reserve—transfer ten percent of monthly sales to an account you can not reach easily. Use your reserve if you have a cash shortfall.
Your business can survive! Schedule 30 minutes a week to review your cash flow.
Knowing whether your business or personal finances are healthy is crucial to your overall success and well-being. Linda Diakite Karressy, the owner of Insight Financial Group, makes accounting fun! She isn’t your stereotypical zero-personality accountant who wears the traditional green shade. She loves breaking down accounting to its lowest denominator so that everyone can grasp it. Plus, Linda’s a natural teacher. As a seasoned accounting professional, she understands how to engage adult learners and hold their attention.