You can't manage what you can't measure
TLDR (Too long Didn't Read)
- The cashflow report tells you how much cold hard cash has entered and exited your business.
- Negative or positive for the wrong reasons cash flow can and will lead to hard times and require you make strategic decisions to become cash flow positive
- Positive cashflow means you can spend on new equipment, hire more staff, or pump extra cash into marketing.
- Unless you track cash flow you won’t know if you’re digging your grave or taking a step towards building a thriving business
As a business owner, understanding your cash flow is like having spidey senses…. If you're a new business owner looking to take charge of your cash flow and make smarter decisions, then this blog is for you.
What is a Cashflow Report (in plain and simple words)
A cashflow report is nothing more than a summary of all the money that goes in and out of your business. It tells you how much money you made, how much you spent, and how much you have left over. This is important because it helps you know if you're making or losing money and more importantly where is the money coming from/going to.
Where can I find mine?
Your cashflow report can be found in your accounting software or in a spreadsheet you made yourself (here’s a template in case its helpful). If you're not using any software yet, it's a good idea to start. This will save you time and effort in the long run, and you'll be able to make better decisions for your business.
Got it, now how do I read the damn thing?
Reading your cashflow report may seem daunting at first, but it's actually pretty simple. There are four main parts to it:
Net Earnings
The cash flow statement begins with net earnings, which is the money left over after paying all your business expenses. This comes from your P&L statement.
For example:
- Your gym makes $20,000
- You spend $15,000 on expenses
- You have $5,000 left. (this is your net earnings)
Knowing your net earnings is important because it's the starting point for understanding your cash flow.
Additions to Cash
Now, let's see some things that can make your cash flow go up. These are changes to your net earnings based on transactions that don't use cash.
Depreciation
On your P&L there is a way to spread the cost of something you buy for your business over its useful life.
Let's say you buy a $10,000 treadmill that lasts five years and would cost $2,000 per year. On your P&L this reflects as $2,000 reduced from your net earnings.
However, whether or not you’ve paid for it already, the $2,000 of ”depreciation” isn’t a line item. If you pay all $10,000 today, its not like you’re paying an additional $2,000 of depreciation. Similarly, if you pay for the treadmill in a month, its not like $2,000 has actually come out of your bank account
Finally, if you pay $5,000 out of pocket and use a loan of $5,000, you’re not spending another $2,000. In this case, the $5,000 you put in would be an “increase in inventory,” and the $5,000 loan would be “loans payable” both of which we’ll explain down the line.
At the end of the day, this $2,000 is not actually leaving your bank so we add it back in to the cashflow statement.
Decrease in Accounts Receivable (AR):
When customers pay you, your AR goes down, and your cash flow goes up. For example, if gym members pay $3,000 in overdue membership fees, this would already have been in your P&L but its not on your cash flow statement.
Since you've actually received the $3,000, you can add it to your cash flow
Increase in Accounts Payable (AP):
If you owe money to suppliers, your AP goes up. Since you haven't paid yet, you still have more cash. For example, if you owe $1,000 on $2,000 of cleaning supplies, your P&L (and your net earnings) already accounts for $2,000 of expenses.
Since you've only actually spent $1,000 you add the $1,000 you have yet to pay into your cash flow.
Remember, this is technically still money you can use, but you should only use it if you know it'll make you more than $1,000 by the time you have to pay the owed amount.
Increase in Taxes Payable:
Like AP, if you owe more taxes, and you haven't paid yet, you still have more cash on hand. For example, if your gym owes $500 more in taxes, you add that to your cash flow statement.
Again remember that you actually owe this money so you should never invest it in something where the returns are a coin toss.
Subtractions from Cash
Next, let's see what can make your cash flow go down:
Increases in Inventory
When you buy things for your business, your cash goes down. For example, if your gym spends $2,000 on cleaning supplies, you subtract that from your cash flow statement.
Financing and Investing Activities
The last part of the cash flow statement is about getting loans, buying or selling things for your business, and other money-related actions.
Equipment
When you buy or sell things for your business, it changes your cash flow. For example, let's say your gym did buy that treadmill.
- You spent $5,000 of cash out-of-pocket. This would be a subtraction from cashflow (like we learnt earlier)
- You also sold your old treadmill for $800. This would get added back into your cash flow statement.
Loans Payable
When you get a loan or pay one back, it changes your cash flow. For example, if your gym gets a $5,000 loan for renovations and a $5,000 loan for that new treadmill, you add both of these to your cash flow statement.
Alternatively, If you pay back $2,500, you subtract it from your cash flow statement.
So with all these additions and subtractions, am I in the green?
Now that you know your net earnings, and what cash REALLY left the bank, you can calculate whether or not you are cashflow positive. Let’s use our Gym for example.
Additions to Cash:
Net Earnings: $5,000
Depreciation: $2,000
Decrease in Accounts Receivable: $3,000
Increase in Accounts Payable: $1,000
Increase in Taxes Payable: $500
Loan Received: $10,000
Sale of Old Fitness Equipment: $800
Total Additions to Cash: $22,300
Subtractions from Cash:
Increases in Inventory: $2,000
Purchase of New Treadmill (in part): $5,000
Loan Payment: $2,500
Total Subtractions from Cash: $9,500
To calculate the net cash flow, subtract the total subtractions from cash from the total additions to cash:
Net Cash Flow = $22,300 - $9,500 = $12,800
Now as a business owner you may be thinking “Great I’ve got $12,800! Let me take out an extra $12,800 in salary"
Think again.
10,000 are loans that you are using with the hopes of increasing your cash flow in the long run (i.e. $5,000 treadmill and $5,000 of renovations should bring in $12,000 of memberships).
If you take it all out of the business, you’ll be 10,000 in the hole, with no new cash inflows and struggling to make your loan repayments.
BUT, if you spend it wisely, you could increase your cash flow by $12,000 a year.
See how one small decision on how to spend your money can completely make or break your business? That's exactly why cash flow is so important.
What kind of decisions can this help me make?
Your cashflow report can help you make important decisions for your business, such as:
- When to invest: If you're cashflow positive, you might want to invest in new equipment, marketing, or staff. This can help your business grow even more.
- When to cut costs: If you're cashflow negative, you need to cut costs and find ways to save money. This generally means cutting back on non-essential expenses.
- When to save: If you're cashflow positive, it's a good idea to save some of that money for unexpected expenses. This can help you avoid dipping into your personal funds or taking out a loan if something breaks or an emergency expense comes up
Sh*t you should look out for
There are a few things you need to look out for when reading your cashflow report.
1. How much of your cash flow is because of loans?
If you're only cashflow positive because of a loan, that's not a good thing. You're basically borrowing money to keep your business afloat, and you'll have to pay it back eventually.
For example, you are cashflow positive with $5,000 in the bank, but you have a $10,000 loan out, that means your cashflow without the loan is -$5,000. Ideally you should think about getting this to a positive number.
2. Can you predict / forecast your cash flow?
It's also important to keep an eye on your cash inflows and outflows to make sure they're stable and predictable. If they're not, you might need to adjust your business strategy or find ways to increase consistent revenue.
For example your cashflow is $12,000 one month but $100 every other month (not totally uncommon for seasonal businesses), its probably a good idea to start thinking strategically about how to leverage your positive cashflow to create offers that are useful year round.
Next Steps
If you’re not tracking Cashflow:
- Here’s a template you can use to start!
- If you’re on one of these popular accounting softwares here are some tutorials on where to find your cashflow reports:
- QBO
- Xero
- If you’re an existing Tally client, reach out to your senior client manager, we got you <3
If you are cashflow positive:
- Run some ads
- Make a valuable hire
- Invest in software or services that save you time (like Tally Accounting ;) )
If you are cashflow negative:
- Figure out the parts of your business that cost you more than they are making you or saving you and cut them out
- Build a plan on how to get to cashflow positive (it might not happen overnight)
- Chat with one of our senior accountants (for free)