“Small entrepreneurs frequently take on large orders that land them in hot water,” explains Ronald Lowy, chair of a college’s business administration department. “They want the large contract, but they are not receiving enough money up front, and they lack the cash reserves necessary to pay employees and other bills while they wait to be paid. They may show a profit on an accrual basis, but not on a cash-flow basis.”
According to Judith Dacey, a certified public accountant, a cash-flow statement is “probably the most critical indicator of whether your business is on track or off track.” As an illustration, she describes how the board of directors of a non-profit organization failed to examine their cash-flow statements.
“They were hiring people and spending money on membership campaigns based on the money they believed they had based on their profit-and-loss (P&L) statements,” Dacey explains. “They were unaware that the profit-and-loss statement was an accrual statement, which means it included paper promises of future payments, not cash on hand.”
The non-profit organization’s board of directors became aware of the issue only after the organization’s check bounced. Layoffs were necessary, and belts had to be tightened. “They could have avoided that if they had seen the cash-flow statements,” Dacey says. “A cash-flow statement informs you of the cash that has actually arrived and is available for use.”
A cash flow statement begins with the bottom line of your profit and loss statement —
the line that indicates net income. Numerous adjustments are made to this figure. The details are a little complicated, but any good accounting program that generates a profit and loss statement and a balance sheet will also generate this statement. s Following the Big Ten s Once you have established a method for tracking cash flow, you can move on to organizing and tracking ten financial statements for your business. That is a lengthy list, but do not fear: As with profit and loss statements, you can automate tracking for a number of the following: • Your Personal Property
It should be simple to keep track of your equipment, furniture, real estate, and other holdings. However, to get a true sense of your business’s value, you must also track changes in the value of those assets. Numerous a Small business has discovered itself on a piece of land that is more valuable than the business itself. Similarly, you will want to keep an eye on the depreciation of assets such as computers and office furniture. • Your Obligations s On the surface, this is straightforward — liabilities are what you owe. However, what you owe is not always as obvious as a landlord’s bill. Payroll taxes are a taxable benefit that are proportional to the size of your payroll. While loans are an obvious liability, you will want to be able to track how much of each payment is applied to principal and interest.
• How much does it cost you to manufacture the goods you sell?
This is relatively simple if you are purchasing a finished item for resale. It becomes more difficult when you have to factor in all the variables involved in manufacturing a product, such as labor.
• How much does it cost you to sell the products you sell?
Advertising, marketing, labor, storage, and the amorphous category of overhead — it is beneficial to understand how much it costs to sell a product in addition to how much it costs to create it.
• How Much Is Your Gross Profit Margin?
This figure is arrived at by dividing total sales by gross profit. If your gross profit margin remains stable or is increasing, you are probably on track. s Tracking a declining margin can alert you to the fact that you need to adjust your prices or costs. In the worst-case scenario, your gross profit and profit margin vanish entirely. At that point, you will be similar to the gentleman who lost money on each sale but reasoned that he could make up for it through volume. Avoid it.
• How is your debt-to-asset ratio calculated?
This ratio can help you determine how much of the property in your business is actually owned by another party — your lender. This ratio increase can be a bad sign. This can occur as a result of a significant expansion, but it can also indicate that you are in over your head.
• How much are your receivables worth?
This is the amount owed to you. If your accounts receivable are increasing, this could be a sign that the people you sell to are beginning to stumble.
• How long does it take you on average to collect on accounts receivable?
This is probably the most vexing piece of information for cash-strapped businesses, as it indicates how many days you spend acting as a ‘banker’ for those who owe you money.
• How Much Do You Owe in Accounts Payable?
Accounts payable is the inverse of accounts receivable. An increase in your accounts payable may simply reflect an increase in the total amount of purchases. However, an unplanned or unmanaged increase can serve as an internal warning that your company’s financial strength is deteriorating.
• What Is the Status of Your Inventory?
Even in today’s just-in-time business world, there are times when stockpiling a significant amount of inventory can be beneficial. s If the prices of the items you sell or use in production are relatively low, it may make sense to invest some of your money in inventory.
Inventory tracking enables you to determine whether your business is growing or contracting. Additionally, it indicates the amount of money invested in this non-productive asset.
Understanding your cash flow is critical to the success of your business. However, the figures can occasionally be difficult to comprehend. Never be afraid to seek professional assistance.