Cash Flow Management for Small Businesses

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One of the most important processes for a business that hopes to remain successful is cash flow management. By definition, cash flow management refers to the process of tracking money coming into a business and monitoring it against the company’s outgoing expenses such as operating costs, employee salaries, and property costs. When it’s done effectively, cash flow management provides a business with a complete picture of costs versus revenue and ensures the company has enough money to pay bills and turn over a profit.

Analyzing Income and Expenses for Optimal Cash Flow

Companies should begin by examining their income statement, sometimes known as a profit and loss (P&L) statement. This is the company financial statement that demonstrates revenues, expenses, and net income generated by a company over a specific period (usually a year). If the P&L statement is accurate, several metrics and analyses can be developed – including cash flow – using this data to provide more in-depth assessments of the health of the company.

Some of the most important items to note on the P&L statement include the following:

Product-level revenue. This is a line item that shows the revenue associated with a specific product sold by the company. There may be multiple lines if the company offers a variety of products.

Cost of goods sold (COGS). This is a figure that denotes the costs directly tied to a specific product. For example, a brewery might list the cost of the grains, yeasts, and flavoring used to manufacture beer.

Gross profit. Gross profit is the amount of revenue left over after subtracting the cost of goods sold. Essentially, it’s the amount of revenue left over that will be used to pay for the company’s operating expenses. 

Selling, general, and administrative expense (SG&A). This is an important figure, and it’s comprised of all costs related to the sale of the company’s product(s) in terms of general operating costs (office, sales, etc.)

Interest expense. This figure demonstrates how much interest a company is paying to fund its operations.

Implementing Strategies to Minimize Cash Flow Gaps

A cash flow gap is the time that elapses between a company making a payment and receiving money from customers. As an example, a company might pay a supplier for stock today. A customer purchases the stock but won’t make payment on it for 30 days. The time between when the company purchased the stock and when the customer paid is the cash gap, and the shorter the gap, the better it is for the company.

The key to reducing the cash gap is reducing the receivables period and days in inventory while increasing the payables period. In other words, companies should seek to get cash out of inventory quickly while delaying payment to suppliers for as long as possible.

Identifying Opportunities for Cost Savings

A professional financial services consulting firm can help you examine your cash flow and find ways to reduce the cash gap and improve cash flow.

DOAAR is a small business bookkeeping, tax, and consulting services firm, with an additional focus on its clients’ personal finances. Specializing in bookkeeping, controller, and CFO services, DOAAR’s offering spans daily accounting, month-end closing, complex financial modeling, and oversight. From execution to analysis and strategy, DOAAR provides clients with a powerful and fully integrated back-office accounting solution. We have locations throughout California and the rest of the U.S. For more information, visit our website or call 888-405-0880.