Money is coming in, but where’s it going? You’ve been expecting to see your accounts flush with a lot of revenue, but why isn’t that the case?

You may be hitting the ground running with new revenue opportunities and increased sales, but are scratching your head when you review the financials and trying to understand where all that money went.   To figure out just what is happening with that revenue, you’ll need to take a good look at your Cash flows.

This guide will go over how to undertake a cash flow analysis, understand why your balance sheet is important, where your operating activities might be creating long- or short-term cash flow issues, and how to fix such problems to maximize your company’s financial performance.

Cash flows demonstrate when money is coming in and when it is going out. If you were able to conduct your entire business with actual cash, this would be a breeze, but the truth is that few businesses have much cash on hand these days. 

Toss in credit purchases, loans, investments, and extensions of credit to your customer, though, and you will see how quickly the concept of cash flows becomes quite complicated.

There are a few steps you can take to get a better handle on your company’s operating cash flow, accounts receivable, net income, income statement, and other measures or flows of cash going into and out of your accounts.

Understanding the numbers and where they originate (or go) will go a long way in helping you make sure you’re setting your company up for future business success.

The first step to maintaining a clear view of your cash flows is creating a well-structured cash flow statement. 

A cash flow statement is similar to your profit and loss (P&L) statement as both represent activity over a period of time. Whether for a short-term time (like a single month) or a long-term one (such as a full year), the cash flow statement shows how individual balances related to how cash inflows and outflows change over the selected period.

Click here for cash flow Excel/Google Sheet templates.

Your cash flow statement differs from a balance sheet, which exhibits financial balances at a point in time, because it typically starts with the opening balances of your cash accounts at the top of the period.

These balances are then adjusted by cash flows related to operating activities, investment activities, and financing activities. In the end, the statement will reconcile to your period-end cash account balances.

Operating activities will make up a majority of your cash flow changes each month. A few quick notes on what to keep in mind during this step:

• Sales receipts, expenses paid, general expenses paid, and employee costs paid would be part of this business activities category and important for any analysis of a company’s cash balance. 
• Taking inventory of such expenses related to operations is key to understanding where your money is going each month.
• You might find that there are elements you’re paying for in that balance that you no longer need for the future, for example, thus creating opportunities for savings.

It’s important to remember that sales or purchases made on credit are not included in the cash flow activity, only actual payments made or received. Be sure you’re examining the right aspects of your business operations here so you can get an accurate accounting of your assets, expenses, and operating cash flow.

Investing activities are financial moves related to the sale and purchase of investments and any income, such as dividends and interest, received from said investments.  A significant event in this area can show you if you are reserving funds for future needs or moving funds from investment accounts to cash accounts.

Negative cash flow for this category indicates you are moving more funds to investments. In contrast, positive cash flow is a sign you are withdrawing invested assets for the business’ other cash needs. Healthy investing activities can be key for company success, especially small business growth, while unhealthy ones could mean you end up with an increase in debt or expenses that you are not equipped to manage.

Financing activities include both cash inflows and outflows related to invested capital, dividends, and long-term debts. These events occur less frequently — often one time per year — for many businesses, so they play a smaller role in regular cash flow management. For others, these financing activities happen in more short-term time frames and thus have more regular impacts on income, expenses, and cash balance.

Either way, keeping an eye on your company’s cash flow from financing activities is important to overall operations because it may make a huge difference in the available amount of money or assets.

There are alternative approaches to creating a cash flow statement, and the method you use may be dictated by the accounting principles and audit requirements for your business or industry. An accountant can help you with this, but here are a few other cash flow-related items to keep in mind: 

• Proper setup and recording of transactions in your accounting software will demonstrate if your business activities are appropriately balanced between incoming and outgoing funds.
• Taking steps for proper setup will ensure your company is viable and profitable as you grow.  
• Simply monitoring your success based on your bank balance or income statement is not sufficient in today’s credit-laden environment.
• You need to become invested in understanding how your cash flow impacts your financial statements.
• Regular reviews of cash will show you exactly where the money you bring in goes.
• It will also help you understand where you can make changes in your operations to improve value.

Even if you have a consistently positive cash flow, a periodic review of your cash flow statement will enable you to answer questions such as:

• Should I invest more of my funds for future needs?
• Am I overburdened with servicing debt?
• Can I afford to buy additional supplies or inventory at a bulk rate discount?
• Are there places where I might be inefficient?
• Should I consult a professional for guidance on investing, accounting, or other financial needs?

Keep each of these questions in mind as you look for where your revenue is being used, and always be sure to ask a financial expert or tax advisor if you are concerned about the ways your cash flow might impact your business operations.  It’s better to understand your net cash flow and the amount of cash you have on hand so you can make the best plans for the future.

Monitoring cash flow will be a huge aid in the decision-making necessary to increase profits and grow your business. Remember:

• Information derived from your company cash flow statement will help you determine when it is feasible to expand your business, invest in new technologies, or accept new opportunities that require an upfront expenditure.  
• The answer to how this can be done — with current cash available, by taking on additional debt, or by tapping into reserves — will be found in your cash flow.
• Without this information, you, as the decision-maker, may be flying by the seat of your pants and hoping for the best.
• Using the tools included with your own set of financials, you can make informed decisions that consistently increase your company’s value and net income.

Do you have questions about your cash flow statement or how the amount or types of cash that enter and leave your business might be impacting your bottom line?

Contact the experts at Silver Tax Group today. Our expert team of tax professionals is happy to help you understand your balance sheet and how best to claim your profits and expenses come tax season.

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