Hi, everyone, I'm Seth David from the world famous Nerd Enterprises, Inc..
You may know me from my YouTube channel where I train growing businesses like
yours on subjects such as accounting, bookkeeping and process
and workflow designs.
I've partnered with QuickBooks
on this video series that covers a spectrum of business topics
that will help you run and grow your small business.
I get a lot of requests from my clients for tips on how to better manage
cash flow. It all starts with the statement of cash flows.
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who like to read, check the link below for the article on this topic.
To start, let's talk about why you need a statement of cash flows,
the statement of cash flows
is going to look at all of your inflows and all of your outflows
to help you make better decisions for your business.
The statement of cash flows
is connected to both the balance sheet and the income statement.
Your balance sheet is a snapshot.
It's a moment in time.
Look at the financial position
of your company looking at assets, liabilities and equity.
Then you have the income statement, which is more of a moving picture.
It's a look at your revenues and expenses over a period of time.
The statement of cash flows helps
a business owner better understand where the cash flows are coming from.
It essentially reconciles your accrual basis net income
with the cash in the bank at the end of a period.
You can create a statement of cash flows using a spreadsheet
or your accounting software is designed to prepare that statement
for you based on the data you already have in the system.
Quick books can prepare this for you so that you can analyze very easily
all the money coming in and make sure that you have enough to cover your bills.
The statement of cash flows is organized into three different sections
that describe the different ways that cash can enter
and leave your business to create a statement of cash flows,
you'll need to go through your entire chart
of accounts and assign each account to one of these three categories.
Of course, if you're using Quickbooks or QuickBooks online,
this is already done for you.
The first section
of the statement of cash flows is called cash flows from operations.
It starts with your in net income
and then goes on to include all the balance sheet activities
that have to do with day to day operations, things
like collecting payments from customers and money spent on office supplies
and all of your day to day activities that you need to do to run your business.
The second part of the statement of cash flows is called the cash flow
from investing activities.
This refers to where you have major purchases, things like equipment
that you would buy for the purpose of generating revenues for the business.
There was a famous case years ago of a company that had really positive
cash flow. But when you look closely at their statement of cash flows,
you would have seen that a lot of the cash
flows were coming from selling off these major pieces of equipment and buildings.
So while they looked healthy for a minute because of the positive cash flows
that that generated, it was for the wrong reasons.
Finally, we have cash flows from financing activities.
This has to do with the owner of the company or investors in the company
who are putting money in.
There's also possibly long term loans where the money received for those loans
also goes into this section because it's considered a financing activity.
Free cash flow is the money that you have left after operating
and investing activities, once you have used up the cash flow,
you have to cover day to day operations, as well as major capital expenditures,
such as, let's say, ovens and things like that for a restaurant.
Free cash flow is what you have left after that to fund the expansion
and growth of your business.
There are several levers you can pull when it comes
to managing cash flows for your business more effectively and more efficiently.
Doing this well can help you avoid the cost of borrowing money
in order to get through.
Here are several ways you can improve cash flow in your business.
The first way to improve
cash flow is to make sure that you have a formal collection policy.
Companies can actually be profitable, but still go out of business
because they're not collecting their receivables on time.
I had a client recently whose cash flow is very tight.
And when I looked at their aging report, which we'll talk about,
I was able to see that by putting a formal collection policy in place,
we could dramatically improve
cash flows, simply sending out letters every 30, 60 and 90 days.
As soon as we did this, money started coming in.
And my client was thoroughly convinced that in terms of the fees
he was paying me, I was worth my weight in gold.
The second way to manage cash flow more effectively is to manage the cash
you're using to purchase inventory.
If you don't have enough inventory on hand,
you run the risk of missing opportunities in the form of lost sales.
On the other side, if you lock up too much cash
in inventory, that can create cash flow problems onto itself.
An example I had of this not too long ago was a client who
I was reviewing his financial statements with him, and he was asking me
a very, very commonly asked question from business owners, which was,
I've got all this profit, but how come it's not translating to cash in the bank?
And after I analyzed his balance sheet on a monthly basis,
I was able to see the picture very quickly and I was able to show it to him.
He was tying up way too much cash in a very quickly inclining inventory balance.
So I was able to show him that's where his cash was.
It was locked up in inventory.
We put a moratorium on buying inventory other than what we absolutely needed.
We bled the inventory values down and that brought in the cash
over the next few months. And he was very happy with me.
Another way to improve cash flow is to automate your invoicing process.
This can save a lot of time.
I did it for my own business years ago, and I'm so glad I did, because it's
not something I really want to spend my time doing.
Not to mention the automation itself.
Invoices are going out to customers. They get the invoices.
They click a button.
If you're using Quickbooks online
and you collect payment right there, and then it couldn't be easier for them
and it couldn't be better for your cash flow.
The last we're going to share with you
for today that you can improve cash flows for your business is by asking
for deposits upfront from customers and also by offering discounts
when you collect money upfront from your customers by way of a deposit.
It will help you fund whatever it is that you have to pay for in order
to provide those products and services that your customers are paying you for.
Offering discounts can also help generate more sales, increasing sales volume.
So while you may collect less money on the sale, you're generating
more sales volume, which can churn more gross profit.
And that's always a really good thing for a business.
Analyzing a statement of cash flows can help you better understand
the financial position and health of your company.
If you want to take it a step further,
you can forecast your own income and expenditures
so you can better forecast the financial direction that your company is going in.
For more on that,
watch the tutorial on how to use the cash flow planner and QuickBooks online.
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