How to Manage Cash Flow (And Make Better Financial Decisions)

By Nick Zarzycki on October 10, 2018

How is it that a small business owner can be great at what they do (and even sell a lot!), but still run into financial problems every month?

In many cases, it’s because they don’t understand their finances, don’t know where their money is going, and don’t know how to deal with cash flow properly.

In this guide, we’ll go over exactly what it means to understand “where your money is going” and make the right changes as a result.

We’ll also go over why things like financial statements and cash flow management are important, and show you how all of this can help you make better financial decisions.

Meet Doris, a typical small business owner

For 15 years, Doris has run Doris’ Orthodontics Lab, a successful local small business. Doris has plenty of customers and is great at what she does, but there’s just one problem: except for her annual tax returns, Doris has never figured out where her business stands, financially speaking.

Doris hates thinking about math and spreadsheets. So like millions of other small business owners, she wings it.

The “winging it” method

Every few weeks, Doris logs into her online banking and looks at how much money she has in her checking account. Whenever she looks at her bank account statement, it provides her with the following information:

  1. How much cash she has right now

  2. Very faint clues about where her money might be going (“Withdrew $400 in cash at ATM on King Street,” “$20 spent at Chipotle,” etc.)

To make things worse, all this information is mixed in with Doris’ personal spending. This system gives Doris almost no information about where her money is going.

During months where money seems low, she might try to piece together her spending history and figure out what expenses she might be able to cut. But for the most part, no matter what she does, every month she finds herself either a little bit ahead or a little bit behind.

This system has Doris feeling stuck. What could she do differently?

Man in a tie at a table with paper on it holding a pencil and using an adding machine

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Here’s what understanding your business’ finances looks like

The answer is: Doris needs a better system for tracking where her money is going.

What exactly does that mean?

Let’s look at what information Doris would have access to if she started bookkeeping and producing financial statements every month (using a spreadsheet, accounting software, or a bookkeeping service like Bench):

  1. How much cash she has right now

  2. What exactly she spent her money on this month, grouped by category

  3. How her spending has changed—day to day, week to week, month to month

  4. Where her revenue is coming from, and when (best-selling services, slowest months, etc.)

  5. How much of her cash is tied up in IOUs (AKA accounts receivable)

  6. How much debt she has, and whether or not she can afford to take on more

In short, this system gives Doris a clear picture of where her money is going, and how it got there.

Put even more simply: it lets Doris understand her finances.

So why is that important?

Practical things you can do when you understand your finances

Figure out whether your business is profitable

Knowing whether your business is profitable is different than knowing how much cash you have on hand.

Figuring out exactly how profitable your business is can be a much-needed reality check. It can show you whether it’s time to put some money into growth, or whether it’s time to start looking for expenses to cut.

Zero in on which parts of your business are losing money

Bookkeeping and financial statements can also tell you how profitable each part of your business is, which can lead to some interesting realizations.

Doris might discover, for example, that she’s spending half of all her revenue on UPS shipping, so she might set up a meeting to negotiate a business package to reduce her shipping costs by 15%. Or she might see that “Meals and Entertainment” accounted for a fifth of her total expenses last month, so she might set up a meeting with her employees to talk about using the company credit card at Chipotle.

Discover which parts of your business are making money

Doris could also discover, for example, that 80% of her revenue is coming from one specific orthodontic appliance, and that she could spend more money marketing that appliance.

It lets you manage cash flow

Cash flow management involves two parts:

  1. Performing regular cash flow analysis for your business

  2. Avoiding cash flow problems before they happen

“Cash flow analysis” is a fancy term accountants use to describe a very simple act: comparing how much cash will flow into your business this month (sales, accounts receivable, etc.) with how much cash will flow out of your business.

If more cash flows out of your business than flows in, you might run into cash flow problems (another fancy term for “run out of cash this month”).

Analysing your cash flow regularly can help you nip problems in the bud and prevent your business from unexpectedly grinding to a halt.

It lets you change course with confidence

Making any big business decision—to cut a line of business, let go of a staff member, or borrow money to invest in a promising a new line of business—can be tricky. But it becomes a whole lot easier when you have the numbers on your side. Bookkeeping and financial statements let you do precisely that: make big, difficult decisions based on real facts, rather than intuition.

How to actually get these insights

So what happens when you’re done with the “winging it” method and want a system that’s a little more legit?

You need to start bookkeeping and producing financial statements.

Here’s how you do that.

Do your own bookkeeping

If you’re starting your business as a side hustle, organizing something temporary like an event, or looking for a stopgap solution, DIY bookkeeping can be a great way to get started.

You can do this using a simple spreadsheet (like this free Income Statement Template developed by our expert bookkeepers here at Bench) or using DIY accounting software like QuickBooks or Xero.

If you end up going the DIY route, consider consulting with an expert beforehand, like a bookkeeper or a CPA. This ensures that you’ve set up your books properly, and that you won’t have to redo them later on.

Cartoon illustration of an income statement

Do Your Own Bookkeeping with an Excel Income Statement Template

Enter your transactions into this Excel template, and voila! You get a ready-made Income Statement. Perfect for entrepreneurs who aren't ready for full-fledged accounting software.

Get professional help

If you’re not familiar with bookkeeping and don’t have the time it takes to learn, you can always outsource it. Our bookkeepers here at Bench will do your books for you, all online.

We’ll also give you software that helps you keep track of your finances in an easy-to-understand way, and financial statements that help you make better business decisions.

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.

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