Business isn’t all about profit. It’s about cash flow—the money flowing in and out of your business every month or year.
Having cash on hand is crucial. Sure, your business could be making a huge profit—but you still might not have cash on hand ready to spend at a critical juncture. Cash flow is critical, ensuring the smooth day-to-day running of a business.
What’s the difference between cash flow and profit?
Cash flow is the net amount of cash being transmitted in and out of a business, while profit is the financial benefit a business receives when its revenue exceeds the overall costs, expenses, and taxes. This is why timing is so important. Even if your business is raking in handsome profit every month, it can still struggle with paying its bills on a specific week.
Basically, cash flow is the healthy pumping of blood through your body. Profit is the benefits you derive from that health.
Calculating your operating cash flow ratio
You’ll need to work out your ‘operating cash flow ratio’ (also called ‘liquidity ratio’). This tells you whether the cash generated from your business’s operations can repay its standing liabilities.
First, work out your ‘cash flow from operations’.
- You can find this number on your company’s statement of cash flow. Or use this formula.
- Cash flow from operations = non-cash expenses + net income + changes in working capital
- To work out your operating cash flow, all you need to do is follow this formula: Operating cash flow = Cash flow from operations/current liabilities
- Your current liabilities means the obligations that are due by the end of the trading year: accounts payable, accrued liabilities, and short-term debt.
Cash flow management tips
Managing cash flow seems like a big task—like having to finally embark on a healthy diet after years of eating Big Macs—but it’s the first step to making a healthy business. Here are some handy tips.
Maintain your books properly
Record every transaction. Monitor payments and invoices. Know where your money is. That’s what maintaining your books means.
It’s overwhelming—a total hassle. But when tax season comes around, you’ll be the one who’s laughing. Maintaining your books to the utmost saves so much time in the long run—allowing you to seamlessly track your profits and losses.
To make the process less arduous, consider outsourcing your bookkeeping. Having an expert on hand gives you more time to do what you’re good at—doing business. You can find a bookkeeper locally. There are also companies online who handle this sort of stuff.
Monitor cash flow
Monitoring cash flow means knowing how much money you’re spending. How much you have to hand. How much you will have after receiving money owed to you. Everyone needs a regular check up with their doctor. In the same way, you need to regularly monitor your business’s health.
If you want to know how much your business can spend, you’ll need a daily cash report that provides you essential information on profit, loss, and expansion possibilities. Then you can start looking for patterns. For example, if your clients are taking longer to pay, you’ll be able to take action.
Forecast cash flow
Now you have a daily cash report, you can become a financial weatherman—you can start making forecasts. Running an eCommerce business can feel like living through periods of feast and famine. But with a daily cash flow report, you can prepare for famine—putting plans in place to keep the ship afloat during periods of negative cash flow.
Unfortunately, there’s no formula for this. You can start by estimating the expenses you might require during a ‘famine’ period. What does an average week of expenditure look like? Sculpt your subsequent budgeting around that.
Benefits of healthy cash flow
Maintaining healthy cash flow sustains liquidity in your business—allowing you to grow. You’ll soon start seeing the benefits.
- Timely repayments of obligations: Stronger relationships with your suppliers. Timely repayments will give you a gold-standard credit rating.
- Reduce the pressure of unexpected crises: Plan for ‘famine’ periods. Make opportunistic investments.
- Grow your business: When it comes to a bank loan, you’ll be in a stronger position to discuss repayment terms and interest rates.
Cash flow is the overall health of your business. While a business can be profitable, it can still fail to meet its financial obligations and suffer in consequence a poor credit rating.
By maintaining forensic bookkeeping and accounting practices, you can maintain a healthy cash flow. That’s where a platform like Osome can help. Founded by eCommerce sellers, Osome automates your financial admin—providing round-the-clock bookkeeping services and financial advice from eCommerce-specialist accountants.