Must have cash flow formula for small business owners

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What is a healthy cash flow?

Cash flow represents the balance in your business’ owings and income. It not only depends on the amount of money going in and coming out of your business account, but also the pace at which they do so. For this reason, businesses need to take due dates, budgeting, and accounting management very seriously.

Having healthy cash flow operations requires attention and accountability. And when put into a sentence like that, it doesn’t seem so hard. Yet, cash flow issues are the leading cause of business collapse.

Cash flow can be a slippery slope. Money moves fast, and before you know it, your business could be caught in the undertow. Let’s look at exactly where businesses go wrong with their financials and a formula to help steer clear.

Typical small business money management issues

Delayed accounts receivable

Your entire cash flow is affected when clients pay late. Small businesses can bury themselves with too many lines of credit. Without any accountability, things can spiral out of control very quickly.

Your accounts receivable should record the money owed by and received by customers. Outstanding accounts will be recorded as such until the money is received. This includes outstanding invoices, IOUs, or in other words, lines of credit that are owed to your business.

Recording the money that is owed is a no-brainer. But keeping track of receiving payment can be a little awko-taco. Especially with sensitive business relationships, no one wants to hound for their money.

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Startup costs

Startups don’t just bloom out of the ground. They’re subject to tons of fees, including insurance, licenses, permit fees, legal costs, partnership agreement, etc. These development costs can really disrupt your cash flow, making it hard to keep your head above water.

A startup business also requires equipment, real estate, business supplies, business insurance, assets, and professional services (more on this in a minute).

As they say, you have to spend money to make money. But startup costs are different from regular small business costs. They’re ongoing and are therefore eligible for government aid. The problem is balancing these costs with the other fees that small businesses face.

Relying on personal funds, small business loans, and grants

Your accounts payable include anything you owe, whether from invoices, income taxes, and loans.

It’s almost impossible to run a small business without taking out a loan at some point in the business’ lifetime. Whether you’re like the many US business owners who in 2018 received an average business loan of $663,000, or like a select few who received a small “loan” of a million dollars, you’re not alone.

But, of course, those loans are attached to interest rates, making them time-sensitive. This acknowledgment can be humbling in the wake of any sign of profit.

Employee costs

Employees cost money. It sucks. (Employees may disagree.)

Employee expenses, such as recruiting, training, salary, benefits, workspace, and whatever else, mean that hiring is not easy money. And then, of course, paying contract workers and offshore employees has its own costs.

Cash flow formula for small business owners

A. Multiply transparency

You need a system in place to keep your payees accountable. Of course, those business partners that have outstanding payments are not out to get you, but any delay in your accounts receivable is definitely not helping your small business. When it comes to having to reach out to get outstanding money, there are solutions.

Now, your business can side-step the entire conflict by issuing automated invoices, and tools such as Veem’s request payment option that can remind payees so you don’t have to.

B. Add in a professional and divide lending

Lending is inevitable. And there’s nothing wrong with that. But when taking out loans from any financial institution, it’s necessary to understand the interest rates involved, to understand some basic accounting principles, and to seek help before problems arise.

When adding loans and interest into the equation, things can get confusing. So, how can you avoid being buried by interest? Track and pay it back. (Ludacris got the flow to make your booty go….) Who better to do that than a professional accountant, bookkeeper, or accounting service?

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It’s not a bad idea to categorize spending in terms of priority or otherwise. This process is ongoing and requires updating, monitoring, and reviewing.

While categorizing your expenses is important, don’t worry too much about separating your deductible costs. Your job is to collect and compile all expenses. Then, hire a tax professional, such as an accountant or bookkeeper who can separate them. This person will also be responsible for tracking your expenses. Don’t let these get away from you. The formula relies on knowing where your money is going.

Can’t afford a pro?

If hiring a professional accountant or bookkeeper isn’t feasible for your startup or small business, look to affordable small business accounting software that can help organize your expenses. Anything that can help you create and maintain a cash flow statement is very valuable.

C. Subtract international wire fees

When paying and receiving money from international partners, bank wires used to be the only option. Although the security of a bank’s warm and fuzzy arms around you and your money sounds nice, it’s not worth the wire fees, wait times, and hassle.

Instead, join our network of international businesses and cut down on paying outsourced workers, wherever they are.

What does that equal?

Of course, cash flow management differs for each business based on its structure and expenses. But with the right equation, your small business or startup can cut unnecessary costs, both globally and domestically.

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* This blog provides general information and discussion about global business payments and related subjects. The content provided in this blog ("Content”), should not be construed as and is not intended to constitute financial, legal or tax advice. You should seek the advice of professionals prior to acting upon any information contained in the Content. All Content is provided strictly “as is” and we make no warranty or representation of any kind regarding the Content.