Of all the critical factors that go into making business decisions, a strong understanding of your cash flow may be the most important for success. While you may think of this as the domain of accountants or financial planners, it’s crucial for business owners to know how their cash flow works.
Keeping track of every financial aspect of a business can be challenging at first, especially with factors that can vary monthly or even daily. By planning your cash flow with BMO’s Business Coach Series, you can make your business finances more straightforward by preparing and keeping track of your cash flow forecast.
What is a cash flow analysis?
A cash flow analysis tracks the financial dealings of your business over a given period. Depending on your business's needs, the cash flow forecast can measure anything as small as daily receipts from your POS system to yearly reports. The goal is to create a financial snapshot of money being earned and spent, especially after reconciling everything.
Planning a cash flow analysis that captures your business's financial state becomes a way to measure profits and losses, but also evaluate how much capital the company requires to operate regularly.
Understanding why it matters
Developing a firm grasp of your cash flow analysis allows greater insight into your operations' financial health. It enables you to make decisions more effectively because you have more information to guide you.
Having a deeper understanding of income, expenses, recurring and sporadic transactions provides vital insights that can help you predict the flow of money to (and from) your business.
Many small business owners consider their first few years of operation the most challenging because of financial issues like projecting revenues accurately or inadequate preparation for unexpected costs. By regularly evaluating your cash flow, making decisions on payroll, applying for the right loan, and other financial considerations become easier and help you operate your business more efficiently.
Growing your business in the right direction is far more straightforward when you have a clearer idea of what your numbers are telling you.
Keeping your business on the path to success
Staying on top of where your money is going leads to improved financial efficiency within your business. It can also preserve a resource you never seem to have enough of as a business owner: time.
Putting a system in place to monitor your business' financial health means you can focus that time on management and growth. Cash flow statements quickly enable you to determine which areas require more attention, so you can optimize and provide better returns.
Incorporating cash flow analysis into your broader business plan can help you determine the most efficient way to operate. It also enables you to adjust your sales when the numbers reveal a story you hadn’t anticipated.
The future will look bright
By understanding your cash flow, you can use it to keep your business on the right track.
The information in this article is provided solely for informational purposes and is not intended to be legal, business or other professional advice or an endorsement of any of the websites or services listed.
Article filed under:money and finance