Managing Cash Flow in Your Business: Statements and Projections

September 28, 2022 ROARK

Picture the moment you came up with the idea for your first business. You're excited, motivated, and ready to make it happen.

You also might've felt fearful or worried.


Is this business a good idea for me?

Can I return my investments?

Can I make a living off of this?


Despite the challenges, you persevered. You took the plunge, and now you're the owner of a new business.

But the hard part was yet to come. When you developed a strategic plan for your business, you made managing your finances a top priority. Was it effective at first?

Many business owners are stellar money makers – but lack money management skills. Because of this, they're wasting and losing significant cash.

If you're facing cash flow problems at your company, you're aware of the loss and are determined to improve it in any way you can.

Closely managing your company's cash flow is critical for reducing this waste and making more money. When you have more cash freed up, you can reinvest in your company to attract more investors and increase revenue. It's even more vital during this current recession.

As a reminder – cash flow is different from profit. Cash flow refers to the net cash moving in and out of your business during a specific period. Profit refers to the sum of all revenues subtracted by operating expenses.


At ROARK, we believe cash is the lifeblood of businesses. As finance experts, we've made it our job to teach small business owners how to excel in money management skills.

Helping you win is our goal. From outsourcing finance and accounting teams to building your own team with our Executive Search service, you can rest assured we'll be there to help you make your company flourish.

In today's article, we'll talk about vital tools you should use to manage cash successfully. They are cash flow statements and cash flow projections.

We'll define these terms and then show you how to prepare and accurately assess a cash flow statement. Then, you can make predictions for your business to make the best financial decisions.


Cash Flow Statements

A Cash flow statement is standard reporting included in financial statements, along with Balance Sheets and P&L Statements.

Balance sheets are financial statements that report a company's assets, liabilities, and equity in a specific time. A P&L statement shows the company's profit and loss.

Cash flow statements are vital parts of assessing your company's financial health. They can help secure investors and make big decisions.

Within cash flow statements are typically three reported activities: investing (cash spent on investments), financing (cash spent/earned on financing), and operating (cash spend/earned on company operations). Each has its insights into your company's finances.


Operating Activities

You should calculate the cash flow of your operating activities to determine how effective they are at turning a profit and how much capital is left over from taxes and depreciation.

You must understand this type of cash flow because it diagnoses your self-sustainability, meaning how capable you are of maintaining profit solely through operational activities.

You'll use these numbers to determine the productivity of specific departments to adjust staff or budgets.

Additionally, investors won't fund your company if its operation activities aren't profitable because it means you aren't running your business very well. They're looking for a guarantee of ROI, which is directly reflected by your operating cash flow, or OFC.

Lenders also look closely at your OFC to determine if you'll pay them back – you'll be more likely to get a loan with a positive OFC.

Most cash flow statements utilize an “indirect” cash flow method which “reconciles” from net income to cash provided by operating activities. 

Indirect cash flow calculation is when your accountant subtracts your net income by any non-cash expenses accrued at a different time than when cash was collected or paid out. That can include things like amortization or depreciation.

Doing this lets you decide if your business needs additional funding or is growing without funding or investments. If the number is negative or below your net income, it's time to reevaluate your operation activities and make necessary changes.

Some improvements for operating cash flow include:

  • Raising prices
  • Collecting outstanding receivables, and
  • Increasing inventory turnover, sometimes by scrapping goods or services that aren't turning over quickly enough

Financial Activities

Financial activities are the cash exchanges made by you, investors, and creditors to pay for dividends, debt, and equity – it's how much your company is spending to pay off obligations.

Understanding the cash flow of your financial activity is crucial because you can reconcile the cash from the beginning and end of your balance sheet. It shows investors how well you manage your company's capital structure and how well you'd pay them back.

For example – if you rely on heavy cash infusions from investors, they or other investors may be discouraged from shelling out more money in case of a market crash.

Calculate the cash flow of your financial activities, or CFF, by adding together the cash paid in dividends (CD) and repurchases of equity and debt (RP) and subtracting that amount from the cash inflows paid for the issuance of equity and debt (CED).

This formula looks like this:

CFF = CED - (RP + CD)

Some ways you can improve your CFF are by:

  • Issuing bonds for investors to purchase
  • Issues stocks and equity to sell to investors, and
  • Borrowing from creditors or banks

Investing Activities

Analyzing your investing activities means determining the cash spent and received through investments.

Investing activities include purchasing or selling long-term facilities, securities, and other businesses. You can determine what's classified as an investment activity by finding changes in long-term investments on your balance sheet, excluding depreciation.

Understanding the effectiveness of your investing activities is important because it shows you how well you manage cash for the long term.

To calculate your cash flow from investments, add the numbers from sales of assets or securities, stocks, and bonds. Then, subtract the amount of money spent on purchases of long-term assets.

In equation form, it looks like this:

CFI = cost of investment sales – cost of investment purchases

Generally, you want your cash flow from investing activities to be negative.

Negative cash flow means you consistently spend more on capital expenditures than on the sale of assets. That isn't a bad thing for investors because it means you're investing in your company's long-term growth.

On the other hand, positive cash flow from investing can mean you're dividing your assets too often. Investors might think you're making acquisitions without being prepared enough.


How Often Should I Prepare A Cash Flow Statement?

For a small business, it's imperative that you prepare cash flow statements often, around monthly or quarterly. At the very least, you should make these statements once every year.

With regular statements, you can keep close track of your company's financial health to make key decisions at the right time. 

Regular statements will also provide you with the most accurate cash flow projections – these are the next steps for ensuring your company's growth in the future. 


Cash Flow Projections

Although business owners rely on cash flow statements to manage their finances, they don't help you as much as cash flow projections. We recommend a rolling 13-week projection program to accurately plan and manage the cash you expect to have, which we've linked below.

Cash flow projections, or forecasts, are essential for small business owners because they provide a more transparent view of their cash.

Not only do you get a clear view of your current state of financial health, but a projection also provides a future estimation of your company's cash flow.

If your projection shows a larger amount of cash at the end of the quarter, this could be an excellent opportunity to reinvest in your company. A small amount means it's probably better to wait to buy new long-term assets like facilities or equipment.


Determining Your Cash Flow Projection

These forecasts utilize a “direct” cash flow method by measuring the amount of cash coming in and going out.

Start by determining your beginning cash balance at the start of the quarter. Add your cash receipts and subtract the cash disbursement to get the net cash flow. Then, add or subtract the line of credit or payments to calculate your ending cash balance.

Make sure your sales numbers are accurate when making these projections – if customers pay you monthly for a good or service, reflect that appropriately in your projections.

For bi-weekly staff payments, calculate which months have three payment cycles. Plan for upcoming monthly or yearly bills and increased tax rates if your business grows.

The projections you make are crucial for increasing the accuracy of future reports and gaining insights into future cash flows, especially when making big financial decisions. Consult the projection before making these decisions, instead of just every time you make a report.


Analyzing Your Cash Flow Projections

If your cash inflows are projected to be greater than the outflows, you'll have extra cash to make purchases like long-term assets.

An optimistic financial forecast will also help you convince investors to participate in your business and prevent problems before they come up.

If you're projecting a negative cash inflow, make a plan. Some ways you can increase the future cash flow are to:

  • Keep an eye on your inventory
  • Add more revenue streams
  • Streamline accounts payable and receivable process
  • Reinvest idle cash
  • Move idle cash to interest bearing account
  • Outsource finance and accounting

With a sound projection, you can build the best business possible by anticipating every opportunity for success or challenges.


Planning For Your Company's Future

We've provided a free 13-week rolling Cash Flow Projection Template in Excel to develop and improve your company's cash flow projections.

Our color-coded template will guide you through setting weekly starting cash balances by:

  • Reviewing receipts and expenditures
  • Calculating your net cash flow
  • Adjusting for lines or credits, and 
  • Viewing final balances

You'll become a better business owner as you learn to manage your cash flow. As you experience steady growth and develop your ability to overcome challenges, your relationships with your employees and customers will flourish.

At ROARK, we'll help you develop a strategic plan to improve your cash flow management with our outsourced finance and accounting teams or hire professionals through our Executive Search service.

We're excited to help you become the best business leader possible.

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