Article provided by Dext
As business as normal gets back under way, Dext is on hand to answer the pressing questions that SMBs are asking. We’ve gone back to basics to help businesses get back on their feet, looking at some of the most fundamental areas you need to know, in order to do so.
We’re starting with cash flow – a topic that nearly every SMB has to manage. We’ll be looking at some of the most popular cash flow queries. Treat this as your go-to guide on the topic – your reference point as you reopen, rebuild and whatever comes next.
What is cash flow?
To put it simply, cash flow is the movement of money, physically or digitally. Net cash flow is essentially the amount of cash and cash-equivalents being transferred in and out of your business.
Knowing your cash flow is key to any well-oiled business. The more you know, the more prepared you are to plan and assess where your business is going.
Cash flow vs. profit
While these are different, it’s really important that business owners have a good grasp of both. To put it simply: cash flow is money that flows in and out of your business. Profit is the amount of money you receive from sales after your costs have been subtracted.
Cash flow isn’t concerned with money owed to you by debtors, or money that’s sitting in your bank; it’s purely focused on the comings and goings. Profit may show you an instant view of your business’s success, but it’s cash flow that gives a more accurate summary of your financial potential.
That’s why cash flow is a much more popular business health metric, often used by investors and lenders when trying to find out how your company is doing.
Calculating net cash flow
As we now know, net cash flow is the amount of money generated or lost by a business. So to work out your net cash flow, you have to calculate the difference between what’s coming in and what’s going out.
To make things simple, there is a net cash flow formula:
Net Cash Flow = Total cash inflows — Total cash outflows
What is a cash flow forecast?
Cash flow forecasts are a game changer. It’s a document that clearly outlines what you can expect to come in and what’s going out over a set period of time (usually 12 months). Alongside this ‘to and fro’ movement of money, it also provides you with your projected income and expenses.
Why is cash flow important to a small business?
As we all know by now, a lot can happen in the space of twelve months. When the world is turned upside down, business owners need a reliable support system to manage the fallout. Businesses that can see what’s ahead, and pivot accordingly, are far better equipped to deal with tricky situations. And, while foresight is often a luxury, it’s much more attainable when you know your cash flow.
Cash flow forecasts, allow business owners to see what’s to come, and then plan ahead. They enable well-informed business decisions which all businesses need. Forecasts answer core questions – those that will define how you perform over the next year. Things like, can we expand in that area? Can I afford to hire that person? Do we need to borrow some money? The bottom line: cash flow ensures your business has the money it needs to keep on growing.
How Dext can help
Cash flow will always be central to business; those who get this will be much more prepared to handle whatever comes their way. Businesses of all shapes and sizes need help understanding, planning and tracking their cash flows. Fortunately that’s where Dext comes in.
We believe in making businesses better at what they do. A lot of the time, that starts with the basics. So, here are some things that will help you stay on top of your cash flow:
1. Get your invoice system sorted
Invoices are something that most SMBs have to deal with. A lot of the time it’s a waiting game – sometimes weeks or even months until you’re finally paid. By automating your invoice system you can start receiving payments quicker and speed up your general turnaround time.
2. Stay on top of your books
Your accounting information should be regularly updated. This is the data that keeps your business in shape and it provides you, and others, with a useful insight into your financial health. When your books are in order, they act as the bedrock for good future forecasting.
3. Refine your accounts receivable process
Speed is everything for small businesses. So when it comes to what you’re owed, the rule is simple: the more efficient your accounts receivable system is, the quicker you can get cash off your balance sheet and into your account.
4. Get a cash flow statement
While forecasting is great for future planning, businesses also need a clear picture of the here and now. Cash flow statements are a key document in the business accounting model. They display your past and current financial position, and are usually the first things investors look at.
Dext backs businesses to be better at what they do. We believe SMBs are the backbone of all economies. So it’s down to us to go above and beyond as business as normal resumes.
Dext is your go-to platform for getting on top of business finances – and back to an even better place. We put you in control of your business within minutes, giving you all the tools you need to capture, upload and track your cashflow – all in one app.