As a business owner, wouldn’t life be easier if you knew what was going to happen in the future? Of course! You would know when money’s coming in and going out, the right time to hire staff, the best marketing strategy, etc.
One area all business owners need to focus on is cash flow. Cash flow is vital for young start up companies with limited capital. Cash flow forecasts are notoriously inaccurate. In a study conducted in 2014, none of the surveyed organizations categorized their cash flow reporting as “highly accurate”. One reason is because the numbers in your cash flow forecast are only as good as the numbers you put in. Other reasons include poor resources and lack of communication.
At TGG, our mission is to make business owners’ lives better through excellent financial management. That means it is our job to make the business owner understands where their money is coming from, where it’s going, and when to adjust business plans.
Before we get too much into cash flow, let’s make sure we understand the difference between cash and accrual basis accounting:
Accrual Basis: Revenue is accounted for when it is earned. Typically, revenue is recorded before any money changes hands. The accrual method records revenue when a product or service is delivered to a customer with the expectation that money will be paid in the future. Expenses of goods and services are recorded despite no cash being paid out for those expenses yet.
Cash Basis: Revenue is reported on the income statement only when cash is received. Expenses are only recorded when cash is paid out. https://www.investopedia.com/ask/answers/09/accrual-accounting.asp
Accrual Basis: The preferred accounting method under Generally Accepted Accounting Principles also known as GAAP. Those standards are reviewed and updated through the Financial Accounting Standards Board (FASB).
You might be asking yourself, how does this impact my business? At TGG, we maintain all our client financial statements in accrual basis. As a business owner, you need to understand what is happening in your business when it occurs. One example is revenue. You might receive a payment three months from now, but you earned the revenue from those services today.
Our goal is to provide you with excellent financial management. One way we can make lives easier for business owners is with a TGG Cash Flow Forecast. Wait, how can TGG predict the future? We can’t predict the future, but we can help you understand trends the business experienced in previous weeks and use that to project the future.
A cash flow forecast will help you as the business owner understand your cash position on a weekly basis. Our team will help you understand what money is coming in and how capital is being spent. In the cash flow forecast, we will analyze the next 13-weeks of your business. We review the timing of cash receipts, anticipated vendor payments, and determine if more capital is needed.
For business owners in the early startup or pre-revenue phase, it is important to understand the financial impact from operational decision making. Some common investments include internal staff, consulting services, tangible and intangible assets, and the list goes on. According to the U.S. Small Business Administration, the rule of thumb for an employee’s total compensation cost is 25-40% more than their normal salary. Most business owners do not think about the following costs like employer share of Federal Insurance Contributions Act (FICA), Federal and State unemployment tax, worker’s compensation, employee insurance premiums, and employer match for employee retirement savings.
Another important topic to understand for startup business owners is when more capital is needed. Business capital is the money available to fund your day-to-day operations and to help grow your business. As a business owner, if you are operating on the edge of your seat with no clear visibility to your finances, it’s hard to persuade investment bankers, venture capitalists, friends and family to help fund your business. Everyone can have a concept, but how can you turn this investment into reality?
Another cash flow key performance indicator is the business quick and current ratio:
Quick Ratio: The quick ratio is an indicator of a company’s short-term liquidity position and measures a company’s ability to meet its short-term obligations with its most liquid assets. (4)
Current Ratio: The current ratio is a liquidity ratio that measures a company’s ability to pay short-term obligations or those due within one year. It tells investors and analysts how a company can maximize the current assets on its balance sheet to meet its current debt and other payables. (5)
Any ratio with a result of 1 is considered normal. It indicates the company has enough liquid assets to pay off its current liabilities. As the ratio results increase, it indicates the business has more than enough liquid assets to cover its current liabilities. The concern grows when the ratio results in anything less than 1 because the business will not have enough liquid assets to cover its current liabilities.
In the early start up days, it is crucial to have the operational and finance business plan work in tandem. Often, a business owner will close its doors because it did not have adequate cash to meet its needs. It’s important for everyone in the business to work together and build a sound financial plan that will allow it to grow and reach the next business milestone. By building these habits in the early stages of your business, you will reach your milestones much sooner.
TGG offers an array of outsourcing services that are critical to the success of the business. Companies who choose to outsource, are focused on improving the performance of the business by looking at the financial data and financial reports of how the business is performing. Our team of accounting experts will help you increase profitability, scalability, reduce risk, and ensuring accuracy with your financial statements. Also, we will put together an accurate TGG Cash Forecast package which will allow you to have greater visibility into your cash position and allow you to adjust your business plans as needed.
If you have additional questions regarding cash flow for your business, contact us today!