Why Your Small Business Needs More Than Cash in the Bank

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We all understand that, if your income statement reports $10 million in revenue, that doesn’t mean your business has that cash on hand. Similarly, having money in the bank doesn’t necessarily mean your organization is profitable. Your company’s financial statements reflect the relationship between profit and cash flow, and analyzing those documents will give you a macro view of your business’s financial health.

At Margin Authority, our team can help small business owners like you understand how to determine your financial performance. Many small businesses don’t have dedicated financial advisors, so as a business owner, it’s essential to know how to use financial statements to analyze your business and develop strategies for improvement.

What are the three financial statements most critical to small businesses like mine?

Financial statements are records of your company’s activity and performance. The three most important financial statements are the following:

  1. Income statement, also known as a P&L (profit and losses): an overview of your company’s income and expenses during a period, typically annually or quarterly
  2. Balance sheet: a snapshot of your business’s financial health that breaks down your assets, liabilities, and equity at a specific time
  3. Cash flow statement: a report of cash inflows and cash outflows during a certain timeframe

Together, these financial statements paint a holistic, big-picture view of your organization’s financial health. Analyzing these reports side-by-side allows you to learn from the past so you can strategize for the future.

What is cash flow, and how does it affect my business?

When you run a business, you start with an amount of cash each month and will either have more or less than that amount by the end of the month. The statement of cash flow lets you know exactly where that money went.

Your cash flow statement helps you adjust your organization’s initiatives and develop strategies based on three categories of inflows and outflows:

  • Operating activity, which includes revenue and expenses in terms of the company’s goods and services
  • Investing activity, which represents cash flow from purchasing or selling assets, such as real estate, vehicles, patents, and the like
  • Financing activity, which shows your company’s cash flow from debt and equity financing, such as debt issuance and loans

A cash flow statement can reveal what phase your business is in and whether it’s rapidly growing or in decline. Knowing the state of your finances is a significant requirement for improving your company’s performance.

Does cash flow positive mean profitable?

Positive cash flow means you have more money coming into the business than going out of it, but that doesn’t necessarily mean that your company is profitable. Businesses can be profitable and not generate cash just as they can generate cash and not be profitable.

Whether you have a positive or negative cash flow doesn’t directly determine how profitable your business is. It’s crucial to look at all financial statements to fully understand the relationship between profit and cash flow.

Can a company with positive cash flow be in financial trouble?

Yes, it can. The cash flow statement doesn’t show all of a business’s expenses. For example, liability payments don’t show up as a cash outflow until the transaction actually occurs.

If a company decides to liquidate its assets due to low product demand, the cash inflow exceeds the company’s revenue since it paid more than it earned from the goods. While the cash flow is positive, the income statement might reveal that the company has poor potential for future earnings due to its profit loss.

Why is cash flow more important than an income statement like a balance sheet?

The statement of cash flow is what really gives you a true picture of what’s going on with your organization. It allows you to see your company’s ability to operate and generate cash.

Even if your company is profitable according to the income statement, you still need to know whether you have enough money to pay the bills. A cash flow statement lets you know whether you have enough money on hand to fulfill your obligations.

What can a cash flow statement tell me?

The cash flow statement is designed to let you know exactly what your obligations are. The cash flow statement is like a checkbook that shows transactions during a specific period. It can show whether you’ve collected revenues or paid debts that appeared on the P&L and balance sheet.

How can I use my financials when operating my business?

Your financials provide you with the clarity to be able to quickly look at those numbers and know that everything has been recorded for the month. This knowledge is essential to successful operations. 

Being able to interpret your financial reports puts you in the driver’s seat of your organization, which is our mission at Margin Authority. We want to help you learn how to take the wheel and make the best decisions for your business. If you can understand a cash flow statement, a balance sheet, and a P&L, you can ensure that your company fulfills its obligations. You’ll also be able to identify areas for improvement.

Can’t I secure business financing with a positive cash balance?

A Margin Authority, we recommend getting financing even when you don’t need it because it’s always easier to secure financing of any type when you don’t need it than when you do. When you have a lot of cash, banks will want to work with your business because they know you’re creditworthy.

Cash flow statements show how well your business can pay its debt obligations and fund its operating costs, so a positive flow is attractive to investors.

What are good debt and bad debt for a small business?

Good debt would be anything that you need to keep your organization moving. Investing in new fixed assets, such as additional property or operation equipment, is good debt.

At times, business owners may need to take on “bad debt” to continue to move the organization forward.

At Margin Authority, we can help you develop a plan to pay off bad debt as soon as possible by looking at your margins and finding the best strategy that works for your business.

The Bottom Line

Analyzing financial statements such as cash flows, income statements, and balance sheets empowers you to get an accurate picture of your business’s financial health so you can follow the best business practices. At Margin Authority, our goal is to help every business owner better understand how to organize their finances and make informed decisions based on their company’s performance.Want to learn more about how to achieve your financial goals? Contact us at Margin Authority today to schedule a consultation or call us at 330-696-4133.

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