A Guide to Cash Flow for Small Business Owners

Last updated 6 months ago

Cash flow is at the heart of any small business and yet most business owners don’t really understand it. Understanding cash flow and its three major components is essential to being able to run an effective and moneymaking outlet. This guide offers a look into cash flow for small family and closely held businesses.

Cash Flow

Any profit or expense that changes a cash account over a certain period is considered to be a cash flow. This is any money taken in or spent. There is no doubt that cash flow is the backbone of any business. When more money is coming in than going out, a business is profiting. If the opposite is true, then a business is losing money. As a business owner, you should be monitoring reports, known as cash flow statements, covering these three areas of cash flow: operating activities, investing activities, and financing activities.

Operating Activities
Operating activities are considered to be any money brought in or spent relating to the core functions of your business. Payroll, products to be sold, and similarly necessary expenses are all included in this section of the statement. This is everything relating to operating your small business.
Investment Activities
Investments include both money taken in from an investments and money lost due to failed investments. Any money that is put into a financial market is included in this part of your cash flow statement.
Financing Activities
Financing activities report on money that was taken in or spent to finance the company’s business operations. This includes loans, repurchase of company shares, payments of dividends, and more. Financing activities are particularly relevant for small businesses that rely on financing to keep their doors open, especially in the first years of business.

Cash flow can certainly be complicated but is a simple indicator of a business’ financial health. Consultants at the Family Business Institute can help you understand your business’ cash flow and look at ways to reduce expenses and increase incoming cash. For more information or to schedule a business consultation, contact our consultants at (888) 438-1948.