There are a lot of responsibilities to handle when you own a business, and that’s especially true if you’re a small business owner. One moment you’re putting on your human resources hat when you’re interviewing a new hire. The next moment you switch gears to marketing when you’re putting together a social media campaign.
Plenty of business owners are involved with their money but in a hands-off sort of way. You can absolutely trust your accountant to balance the books and handle day-to-day things, but there’s one important thing every business owner should understand: their cash flow analysis.
Here’s everything you need to know about how to understand cash flow in your business.
What is a Cash Flow Analysis?
At its core, a cash flow analysis is a report that shows every way a business uses money. It’s absolutely crucial if you want to be able to have a comprehensive view of how business’s financial health.
There are three main things financial professionals look at when they’re looking at cash flow: operations, investments, and financing.
Investing costs can come from buying and selling assets. This can include physical assets like property or vehicles or even something more abstract like patents. Financing focuses on any costs that come with debt and equity financing.
Don’t make the mistake of viewing a cash flow analysis as a simple ledger of all your purchases and payroll. They take a very in-depth look at where money is going and how it’s being spent.
This is why a cash flow analysis is so important for business owners to read and understand. You can spot potential problems and look for any suspicious behavior when you receive them.
How to Understand Your Cash Flow Analysis
The simplest way to understand your cash flow is to view it in terms of positives and negatives.
A positive cash flow occurs when you have more money flowing in than out. This is an ideal state to be in because it gives your more freedom to bring in new staff, try new offerings, or pay off debt.
A negative cash flow occurs when you’re putting out more money than you’re bringing in. Remember, a negative cash flow doesn’t necessarily mean you lost profit. There may be issues with mismatching income or expenditures.
If you want to truly get the most out of your cash flow analysis, view it as a statement of health about your company. Everything you see on your sheet should be able to give you insight into how your company is performing.
Have you noticed revenue going down while you’re spending the same on materials and operating costs? Did the cash advance you got from alto-capital.com get eaten up a lot faster than you thought it would? It seems like you’re in a period of decline and should think about the best pivots to make.
Are you spending more on materials while you notice your revenue steadily increasing? Did you notice an uptick in costs associated with bringing in new employees? If so, congratulations! Your business is in a period of growth, and you may want to focus on the best ways to keep it sustainable.
Learn to Master Your Money
A cash flow analysis may seem like another simple piece of documentation you get when you talk to your accountant and finances. However, savvy business owners know that it’s the key to gauging the financial health of your business.
Do you want to learn more about finance? Browse more of our finance posts so you can start making your money work for you.