Cash flow management is one of the essential aspects of every business, including online businesses.
If you’re just starting out, it’s crucial to understand what cash flow management is, why it’s vital, and how it relates to profit. For those reasons, we’ve created a guide to answer all questions about this crucial factor in ensuring business health.
Additionally, you’ll get actionable advice on calculating profit, knowing how to manage a cash flow deficit, and how to solve other cash flow-related problems.
What is Cash Flow Management?
By definition, cash flow management refers to tracking the amount of money coming in and out of a business.
Taking care of this business aspect means you can predict how much money you’ll have available in the coming years (or months.) A cash flow forecast helps you understand how much money you’ll need to cover debts, such as paying salaries or suppliers.
To be more precise, by “cash flow,” we mean the change in the amount of money your online business has at two points in time. When a company has a positive cash flow, more money enters the company than leaves. Negative cash flow means the company has more money going out than coming in.
With cash flow management, you keep track of this flow, analyze it, and make changes accordingly. This approach helps spot trends, prepare for the future, and tackle cash flow issues.
If you want to know whether your business will have enough money to grow, you should focus on cash flow management.
The Difference Between Cash Flow and Profitability
The main difference between profitability and cash flow is in the data. Profitability shows how much money a business has left after covering all expenses such as employee salaries, the purchase of supplies, taxation, and suchlike.
Cash flow, on the other hand, shows the broader picture. It indicates the net money flow in and out of a business.
Many online business owners try to find a single metric to help them understand a company’s wealth. Investors also look for a single number to determine whether investing would be profitable for them. Some will look for cash flow, others for profit. These are two equally essential metrics in their own right.
To understand the core aspects of a business, you need to understand them both and their interaction. This is the best way to evaluate a business’s financial health.
There could be times when a company is profitable, but it has a negative cash flow making it difficult to pay for all expenses. The opposite is also possible, especially with startups. These companies struggle to make a profit, but their cash flow is positive.
How to Calculate Profit?
To calculate profit, you need to understand these terms:
- Cost – the money you spend to acquire the products you sell
- Revenue – the money you earn from selling the product
- Profit – the money you gain overall
Calculating profit involves a simple formula that consists of subtracting the cost from the price of the item:
Profit = price – cost
If you want to calculate profit for more items, the formula will be:
Total profit = revenue – total cost
To calculate your gross profit, subtract the revenue and the cost of sold items before overheads deduction, taxes, and payrolls.
Finally, to calculate net profit, you want to subtract the operating expenses (equipment, marketing, rent, etc.) from the gross profit. If the net profit is positive, you’ve gained money. If it’s negative, you’ve lost money.
Why Is Cash Flow Management Important?
Cash flow management is easily the most crucial aspect of every online (and offline) business. There are several reasons why that is:
- Makes sure you don’t break the bank
- Allows you to pay salaries promptly
- Helps avoid overspending
- Let’s you start growth funds to expand your online business
- Gives a projection of account payables
- Allows business growth
- Assures stability and peace of mind
- If neglected or not done correctly, cash flow management can often lead to business failure.
FAQ
Does Cash Flow Positive Mean Profitable?
Being cash flow positive doesn’t necessarily mean being profitable. An online business can have a positive cash flow, but that won’t be enough to make it profitable. This means that a certain amount of cash has entered the company, but the expenses were higher than that. That’s why the company didn’t profit from the revenue.
How Do You Solve Cash Flow Problems?
There are a few things you can do to keep a stable cash flow or solve potential problems:
- Perform cash flow forecasts. Try to estimate how much cash you’ll bring to the company and how much you’ll spend. Make a list of all expenses, how much they are, and when they’re due. Accordingly, write down the revenue you’re sure will enter the business, starting from subscriptions, contracts, and similar
- Use cash flow projection templates. Excel or Google Sheets templates can help track your cash flow forecast
- Always have a cash reserve for unexpected expenses
- Invest in a better marketing strategy to boost sales, which will keep money coming in
- Offer different payment methods to ensure payments from more customers
How Much Cash Flow Should a Small Business Have?
Deciding how much cash you plan to use and how long it will take you to get where you want to be can help determine how much money your online business needs to keep running.
To get an idea, figure your average monthly cost and multiply it by three to six. That’s approximately how much cash your business should have. For example, if your monthly expenses are around $3,000, you want the cash revenue between $9,000 and $18,000.
What Should You Do if You Have a Cash Flow Deficit?
Check your financial statements. Get to the root of the problem by analyzing income statements, balance sheets, and cash flow statements. Try to find the reason why your online business didn’t make any profit over a specific time.
- Cut back on unnecessary costs. Only spend money on supplies and services that are necessary
- Diversify payment methods. Try to use as many paywalls as possible. This will increase the number of customers paying you
- Keep good relations with vendors and lenders
How Does Inventory Affect Your Cash Flow?
Having control over your inventory can be crucial in ensuring positive cash flow, which is quite logical. You want to source and manage your inventory to increase profits. If you keep having increased inventory stocks’ expenses, they will show negatives on your cash flow statement, meaning you invested in more items than you sold.
Recommendations
Bench
If you need a hand with cash flow management, we have an excellent solution for you. Bench is America’s leading accounting software focused on small businesses.
They offer monthly bookkeeping services to online business owners who are up-to-date with their bookkeeping and those behind. Their Bench Tax program takes care of your bookkeeping, tax preparation, and tax filing.
Why we Like Bench
- Actual bookkeepers
- Robust tools to streamline the bookkeeping process
- Monthly expense reports
- Decent pricing
- Has a free trial
Cons
- Occasional synchronization issues with other platforms
Freshbooks
Freshbooks is a popular invoicing tool, particularly for small online businesses. Few programs can compete with Freshbooks when it comes to helping users save time with invoicing. In addition, it comes with many features and functions.
What We Like About Freshbooks
- Detailed reports
- Easy to use
- Team collaboration tools
- Mobile app
Cons
- Mobile app is less useful
- Lower degree of customization
- Little setup help
QuickBooks Payments
QuickBooks Payments is great for accounting, e-commerce, and much more. It’s better for mid-size and larger online businesses due to its powerful functions, but it fits right in with offices of all sizes.
What We Like About QuickBooks Payments
- Predictable pricing
- No monthly minimums
- Good for professionals
Cons
- Limited invoice customization
- Slow deposit times
Using Cash Flow Management to Your Advantage
Cash flow management is, without a doubt, one of the most critical aspects of every online business. In this article, our goal was to provide you with detailed, actionable advice about this topic. Hopefully, you gained more insight into what cash flow management is and how to manage it properly.
Remember that by taking care of your cash flow, you take care of your business and save it from failure.
You also get insight into future expenses, so you have enough time for possible adjustments. It’s nothing but benefits with this one, so make sure to start incorporating it into your daily business activities – the sooner, the better.
