Running a business means staying on top of your finances – but that’s easier said than done. If you feel as though you’re losing more money than gaining, it’s essential to track and control your cash flow as soon as possible.
What is Cash Flow?
Cash flow refers to all the money that flows in and out of your business. Loans, purchases, sales, profits – cash flow refers to all of it. Many financial advisors break cash flow down into these three categories:
- Operating: sales, expenses
- Investing: assets, loss of assets
- Financing: raising equity, repaying debts
All businesses want an overall positive cash flow. The reason is that you still need money to sustain your business, fulfill your personal needs, and pay off any loans and debts.
The process of tracking your cash flow may appear complicated, but it doesn’t have to be. Our advisors at Strateqiq simplify following your cash flow with two tools: profits/losses and balance sheets.
Organizing Cash Flow for Your Business
Your multiple streams of cash flow become muddled if you don’t organize the information. Tracking your cash flow also helps you spot any areas in your finances that need improvement. For example, you might notice that a specific investment leads to greater loss than gains.
As such, we suggest creating a profit/loss and balance sheet. These two tools are different but go hand in hand when it comes to tracing your cash flow.
Profit and Loss Sheet
A profit and loss statement tracks your operating activities. For example, how much profit do you earn each month from sales? Alternatively, how much does it cost to run your services, pay your employees, etc? The profit and loss statement focuses on that end. From this insight, you can make adjustments that ultimately lead to greater profits for your business.
A balance sheet details everything related to the investment and financing activities we mentioned earlier. For the investment side, your business may have invested in various properties and equipment. For the financing activities, this includes income from debt and stocks or paying back loans.
It’s important to differentiate between your profit/loss and balance sheet. Both of these tools will give you a general overview of the cash flow within your company. Keep in mind that a negative cash flow from one activity isn’t always a bad sign. For example, you may have invested a lot of money into improving your equipment for one year. However, on the other end, you may have drawn in massive sales because of this investment. That’s the benefit of having the whole picture through both a profit/loss and a balance sheet.
Understanding your cash flow activities is essential to sustaining a business. From this data, you can make the right decisions to place your company in a sound financial position.
If you’re looking to stay on top of your cash flow, our associates at Strateqiq are more than happy to help. As business advisors and Certified Professional Accountants, we have decades of experience combined to get you the business results you want.