What are the signs of a healthy cash flow statement for your small business?

What are the signs of a healthy cash flow statement for your small business.jpeg

It’s common for small business owners to feel out of their depth when it comes to managing their finances. In fact, one study found that 82% of small businesses fail because of cash flow problems. But how do you know when you’re doing OK and when you’re about to run into difficulty? Here’s an overview of the signs of a healthy cash flow statement in relation to the main sections of your statement.

The bottom line

The overall performance of your company can be determined from the net increase or decrease in your cash equivalents. It’s this that determines the change in your finances from the last period. However, it’s impossible to get a full analysis of a business’ performance from the bottom line alone. A more thorough look at each section of your cash flow statement is needed as they interact with one another, showing the kinds of activities your business is undertaking and its potential for growth.

Operational activities

When it comes to charting income from your principal business activities minus costs like accounts receivable and payable, deferred taxes and one-off charges, you should ideally end up with more money coming in than going out. Not only that, you should be able to see that it grows month on month. Decreasing sales, squeezed margins, and late customer payments are all reasons you could be experiencing a negative cash flow here. You can try and curb this by re-evaluating your marketing strategy, finding ways to add value to your service or product, and reducing your number of debtor days (the amount of time it takes customers to pay) as well as following up on late payments with penalties.

Investment activities

This is the income you have from buying and selling long-term assets, and if you are growing, it is generally regarded as a good thing if your net investment cash flow is negative. This might be because you are investing in new property or equipment in order to develop and innovate, which can be tantamount to expansion. The key is keeping it consistent.

Financing activities

The financing aspect of the cash flow statement records any incomings and outgoings between a business and its creditors. It’s often considered that a negative cash flow here is the marker of a stable business because it isn’t relying on selling its financial assets but instead income from its operational activities to pay off debts and dividends.

Still, it’s important to note that there’s nothing wrong with a positive net cash flow in this section from time to time, especially if you are a growing business. Borrowing working capital can help fund your expansion plans; the trick is ensuring any external financing is repaid on a consistent basis. This won’t just improve your cash flow statement but will raise your credit rating and make you more appealing to investors and further lines of credit to fund any future growth.

Maintaining a healthy cash flow

A healthy cash flow is crucial to ensure your business keeps ticking over, but if you’re struggling, you shouldn’t feel alone. A strategic funding source like like LVRG can help give some security to your small business with fast small business loans. Whether you’re in the restaurant, retail, manufacturing trade, or any other, your cash flow statement is there as a guide to help with revenue forecasting, enabling you to determine how much you can afford to borrow, and providing an incentive to financial backers about your ability to pay it back. Have questions? We're here to help!