For most Small Businesses, cash is the most important component in their financial statements due to the fact that most profits are received in cash (checks, electronic debits or actual dollar bills), and almost all expenses are disbursed as cash (checks, electronic transfers or actual dollar bills). Therefore, proper management is very essential to a small business survival. When the budget is poorly managed, the small businesses may be lost in ruins; but if cash is skillfully and knowledgeably managed, small businesses can continue to develop and further expand.
Do to our experience dealing with small business owners, I came up with this list of the three most important components of cash flow a Small Business needs to keep an eye on:
Planning & Budgeting
During this phase, a small company should be able to prepare its budget. A cash budget would include expected from desired sales and loans and cash allocated for anticipated expenses for the next business cycle (also known as Accounting Period or Fiscal Year). To have a sound budget, the manager’s plan should be to have more cash sales than cash expenses by the end of the year.
The Implementation phase is actually the year of operations, this is the phase wherein all planned activities and planned budgets are put into action. During this phase, a small company must be able to work within the previously set cash standards or budgets. A good cash management would result to more actual cash sales and lesser actual expenses than the planned budget.
Nonetheless, all the transactions held within a company must be evaluated regularly in order to achieve or improve proper management and a cash flow statement must be prepared. The flow statement is a summary of the actual cash receipts and expenses of the company classified into three categories (Cash from Operations, Financing and Investing Activities). In evaluating whether the company has a good management, the flow statement should yield to a positive amount. By performing this Flow Statement analysis in combination with a comparison of Operation Budget vs Actual Income and Expenses the average small business owner must have an idea of how well his company Cash flow is been managed and possible areas to improve.
To sum it all up, after the company’s planning, implementation and review of the actual results vs budgets, having a positive flow would not necessarily mean that your company has been applying the best cash management policies. A company should further evaluate whether their company has been holding too much cash. When a business is having a large amount of cash, the managers should consider planning and devoting some cash in other investments that could get a better return to you as the business owner.