How to Calculate Cash Flow for Your Small Business
Without a steady stream of cash coming in, it can be difficult to pay your bills, invest in growth opportunities, and eventually turn a profit. That’s why it’s essential for every business owner to understand how to calculate their cash flow. In this blog post, we’ll explain exactly what cash flow is, how you can measure it accurately and easily, and why it should be one of your top priorities as a small business owner.
Cash Flow Basics
Cash flow is the difference between how much money comes in and how much money goes out over a specific period of time. It’s important to understand that cash flow doesn’t include any non-cash transactions such as depreciation or amortization expenses. Rather, cash flow measures only the actual amount of liquid funds entering and leaving the business.
Measuring Cash Flow
To accurately measure your cash flow, you’ll need to compile all of your income and expense documents for the month or quarter in question. This includes any invoices received from customers, payroll records, and reports of payments made to suppliers. Once this data is collected and organized, you can then calculate your cash flow by subtracting your total expenses from your total income.
Cash Flow Is Not Profit
It’s important to remember that cash flow is not the same as profit. Profit measures how much money a business has made after all of its expenses are taken out, while cash flow simply tracks the actual amount of liquid funds entering and leaving the company. As such, it’s essential for business owners to keep a close eye on their cash flow. That way, you can see if you need to adjust your pricing or expenses in order to maintain a healthy level of liquid funds.
The Bigger Picture
Measuring and tracking your cash flow is also beneficial because it allows you to have a better understanding of where your money is coming from and going to. This can be incredibly helpful when making decisions about what investments to make, which expenses to cut, or even how much money you need in the company’s reserves.
Without a steady stream of liquid funds entering and leaving your business, it can be difficult to pay your bills and eventually turn a profit. To make sure you’re making the right financial decisions for your company, it’s essential to measure and track your cash flow regularly. With the right information in hand, you can make informed decisions about how to grow your business and keep its finances healthy.
