Understanding Cash Flow Basics for Your Small Business

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• What Is Cash Flow?

In this section, we delve into the basics of cash flow, from understanding cash inflows and outflows to analyzing cash flow statements. We will guide you through techniques to improve cash flow, thus ensuring financial stability and setting the foundation for growth in your small business.

In business, the equivalent of oxygen is cash. Without cash, a business does not survive. Cash flow, which is the constant inflow and outflow of cash in a business operation, is literally the lifeblood of a business. It’s also one of the biggest challenges business owners and entrepreneurs face. 

In this video, we’re going to be talking about planning for small business cash flow. 

Hey everybody, Will Scheren here from Small Business Startup Guide by TRUiC. This video is part of a larger course dedicated to helping small business owners cut through the noise and get to the essentials of starting and operating their business. If that sounds like it would be really useful to you, be sure to like and subscribe. 

The term “cash flow” refers to the net amount of cash and cash equivalents that’s transferred in and out of a company. Cash received represents inflows, while money spent represents outflows. 

Ultimately, your business needs to ensure that it never runs out of cash to meet its obligations. Failing to do so will leave your business idea stuck without any further moves to make on the board. So you want to make sure that you’re planning your business decisions in a way that will allow you access to funds that you need to satisfy any bills that you need to be paid off to keep your business moving. 

For the last several videos in this course, we’ve been showing you how to make financial projections using LivePlan.com, and in this video, we’re going to show you how to plan your cash flow so that you know that the roadmap that you’re building for your business has oxygen to keep it alive. 

At TRUiC our mission is to offer all our resources and information for free – but we support our work by using affiliate links, meaning we earn a commission on many of the amazing deals we’ve negotiated for you. Full transparency, LivePlan.com is one such affiliate partner. Link in description below. 

Click on the “Forecast” tab on LivePlan.com and then click on the “Cash Flow Assumptions” sub-tab. On this page, you can adjust settings that will help life plan calculate your future cash flow. Namely your accounts receivable, your accounts payable, and your inventory. 

Accounts receivable is any money that your customers owe you. If you plan to invoice your customers and get paid later than when you provide your products or services to your customers, then you’ll have an accounts receivable account. 

To forecast your accounts receivable and ensure that your cash on hand forecasts remain accurate, Let LivePlan know what percentage of your total sales will be invoiced to be paid at a later date by your customers, and then move the second slider to let LivePlan know the average number of days it would take for your invoices to be paid. 

Accounts payable is any money that your business would owe its vendors. When you make a purchase and are invoiced in a manner that allows you to pay later, then you’ll have an accounts payable account. Just move the sliders to indicate the dollar amount of purchases that you make on average that will be purchased on credit and how many days on average you’ll take to pay those invoices. As you change these settings, your changes will be reflected in your cash flow chart. 

Product-based businesses will have the inventory that they need to track. Inventory purchases and sales play a major role in your company’s cash flow, so LivePlan’s inventory calculator helps you plan for the income and costs. If you use the inventory function to track your inventory with LivePlan, it will make the assumption that the direct costs you entered for earlier projections that are not labor costs are your inventory to create and sell your products. 

To track inventory with LivePlan, turn the inventory switch on and adjust the months to keep on hand slider to let live plan know how much inventory you plan to keep in stock, and then add a minimum order size. LivePlan will use your direct costs and minimum order size to calculate the right amount for each period. 

When the direct costs have accumulated to a point where you have less than the minimum amount of inventory on hand while needing to purchase more inventory than the minimum order amount, LivePlan will forecast a reorder. That purchase will appear in your balance sheet and cash flow. 

We’ve been focused on planning to ensure that your business has access to cash and cash equivalents in this video, but what do you do if you have an opportunity come up that would be healthy for your business to capitalize on, but you don’t have the cash on hand to be able to seize the opportunity? Well, that’s where outside loans, investors, and lines of credit come in, which is exactly what we’ll be showing you how to plan for in the next video. 

This video is part of a step-by-step course that provides business owners all of the essential information to start and operate their business. We provided a link for you to get access to all of the free and discounted business tools we mentioned in this course below this video. 

Be sure to like and subscribe to get more of this content. I’ll see you in the next video, and if you have any questions, let us know.