Small business owners often overlook the importance of tracking their cash balance or make mistakes while doing it. The truth is, although preparing or reviewing a cash flow statement is another task in your already busy schedule, it’s crucial for helping your company prepare for what’s to come – both the good and the bad. Here are four benefits of using a cash flow statement to track your company’s performance.
1. It Allows You to Track Changes in Your Cash Balance
By calculating cash income versus cash expenditures, you can identify patterns in how much and when money is coming in and going out. This allows you to plan for upcoming bills, pay periods, and unexpected emergencies with ease.
2. It Paints a Clear Picture of Your Business’s Financial Health
By getting a snapshot of your cash flow, you can see whether operations generate enough revenue for your business to sustain itself. It also lets you see your company’s true liquidity because the cash flow statement doesn’t factor in outside help from investors, loans, or lines of credit. This can give you better insight into your business’s true financial strength and sustainability.
3. It Lets You Review Your Company’s Monthly Performance
The more often you analyze your cash flow statements, the more obvious cash flow patterns will become. This allows you to better predict and prepare for shortages. Seasonal businesses and those with predictable downturns or slow periods should be especially conscious of their cash flow. Having an accurate picture of your finances makes planning for months of fluctuating revenue easier and helps make sure that you are covered for your year-round expenses.
4. It Gives You a More Accurate, Cash-Only View
Companies sometimes make the mistake of evaluating their finances based on all transactions – cash and credit-based – at the time they take place. This gives you an idea of your business’s performance, but it won’t give you a clear picture of your company’s financial health. It’s important to avoid overestimating your assets in hand.
A cash flow statement measures cash transactions only. This gives you an up-to-date view of your company’s liquidity and financial health, so you have a better idea of how your company is doing in meeting its short-term obligations. It’s an essential component of any financial plan. Just remember that it does not show whether the business will be profitable; it shows the cash position at a specific point in time, which can help you make more informed business decisions in the long run.
The information contained herein is for general informational purposes only and does not constitute tax, legal, or business advice.
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Nu Direction Lending is a digital-first business lender that was formed and is funded by credit unions. We combine the speed and convenience of online lenders with the personalized touch of the local credit unions who help fuel our local economies.