Running a business can feel like trying to steer a ship through choppy waters. You’re watching your sales, expenses, and profits, but something feels off. You’ve got revenue coming in, but when it’s time to cover payroll, the cash just isn’t there. What’s going on here?
The answer often lies in how you understand your cash flow or, more specifically, how well you don’t understand it yet. Many business owners focus on profit but don’t always track when those profits turn into actual cash. That’s where we feel visualizing cash flow comes in handy. By turning complex financial data into clear, actionable insights, you’ll be able to spot cash shortages before they become problems and make better financial decisions for your business.
Let’s explore how you can leverage cash flow insights to fuel your growth, avoid the common mistakes we see, and build a stronger financial foundation for your business in the process.
How can I use cash flow to manage growth?
Growth is an exciting time for any business. It’s proof that your hard work is paying off. But there’s a catch: growth, if not carefully handled, can sink you just as fast as a downturn. It’s like trying to ride a bike downhill: without the right control, you can quickly lose balance.
Many businesses dive into the growth phase without stopping to ask, “Can my cash flow handle this?” They focus on sales, and while the numbers look good on paper, they don’t consider the reality of paying their bills. If your cash flow can’t keep up, you might find yourself with no cash to cover your day-to-day operations.
Cash flow is your business’s fuel. You might have the best engine (i.e., high sales), but without enough fuel (the cash), your business won’t go very far. Timing is crucial. Align your spending with when your revenue actually hits your business account. For instance, if you know your peak sales season is in the summer, plan your big investments then and not during the slow months.
Cash flow forecasting is another essential tool. Think of it as your business’s weather forecast. It lets you run different “what if” scenarios, helping you anticipate storms before they hit. What if sales drop? What if expenses spike unexpectedly? By running these tests, you can make smarter and more strategic decisions and ensure your growth doesn’t outpace your cash.
How is each section of a cash flow report calculated?
Your cash flow report is broken down into three parts: operations, investing, and financing. Each section gives you a piece of the puzzle that, when put together, forms a full picture of your business’s financial health.
Operations
The operations section tracks the cash your business generates (or uses) through day-to-day activities such as sales, employee wages, rent, and utilities. If this section is positive, your business is generating more cash than its spending, which is always a good sign. But if it’s negative, it means your business is using more cash than it’s bringing in, and that’s a red flag. These figures come primarily from your Income Statement (profit & loss).
Investing
The investing section tracks cash used for growth for things like buying new equipment, purchasing assets, or expanding operations. Typically, this section will show negative cash flow, and that’s okay. It means you’re making investments for the future. However, if these investments don’t pay off or are draining your reserves too quickly, you could end up with a cash shortage. These figures come primarily from the assets portion of your Balance Sheet and may also draw from the expenses on your Income Statement.
Financing
This section records cash flows related to borrowing money, repaying loans, or issuing stock. Positive numbers might indicate you’ve secured new funding, while negative numbers usually reflect debt payments. You want to keep a healthy balance here to avoid over-relying on borrowed money to run your business. These figures come primarily from the liabilities and equity sections of your Balance Sheet.
By understanding how each section is calculated, you get a clearer picture of where your money is going and how well your business is managing its cash.
What figures should I want to see as positive? Negative?
Your cash flow report is like a financial checkup for your business. Some results will give you peace of mind, while others will raise red flags. Knowing what to look for can help you stay ahead.
Positive Figures: A Good Sign
A positive operations cash flow is one of the strongest indicators of a healthy business. It means your core activities are not only covering your expenses but also generating extra cash that can be reinvested or saved. Similarly, a positive financing cash flow might mean you’ve secured new loans or investments, giving you the fuel to grow your business.
Negative Figures: Not Always a Bad Thing
Negative numbers aren’t always a cause for concern. For example, a negative investing cash flow typically means you’re putting money into future growth—whether it’s through new equipment or expanding your reach. That’s normal, as long as it doesn’t drain your account too quickly.
However, sustained negative cash flow from operations is a red flag. It could mean your business is spending more than it’s making, and that’s not sustainable. Take a close look at what’s driving the negative cash flow and consider adjusting your operations or expenses.
Profitable on paper, but struggling for payroll?
It’s a situation many business owners find themselves in: Your income statement shows profits are trending up, but when payday comes, you’re scrambling to cover payroll. How does that happen?
The answer lies in cash flow timing. Your income statement shows revenue when it’s earned, but that doesn’t mean you’ve collected the cash yet. If clients are slow to pay or you have too many outstanding invoices, you can be profitable on paper but cash-poor in reality.
The Cash Flow Trap
Let’s say you land a big sale, invoice your client, and they have 60 days to pay. During that time, you still need to pay your rent, payroll, and other bills. This gap between earning revenue and receiving cash is what often leads to cash flow problems. If you don’t manage it carefully, you could find yourself in a tough spot with lots of sales, but no liquidity to keep the business running.
Staying Ahead
To avoid this trap, closely monitor your accounts receivable and make sure you’re collecting payments on time. Align your expenses with when cash actually enters your account and use cash flow forecasts to spot any gaps early. This way, you can plan ahead and manage both profits and payroll without the stress.
How do I utilize cash flow reports for strategic decisions?
Your cash flow report isn’t just a look at the past, but it’s also a tool for planning the future. When used strategically, these reports can help you make informed decisions that strengthen your business.
Spotting Growth Opportunities
One of the most valuable insights a cash flow report provides is when your business has enough liquidity to invest in growth. Whether it’s hiring new staff, expanding your operations, or purchasing equipment, timing is key. By tracking your cash flow trends, you can identify the best moments to take calculated risks without straining your day-to-day operations.
Engaging Stakeholders
Cash flow reports also serve as communication tools. Whether you’re talking to investors, board members, or key employees, visual reports help simplify complex financial data. No more wading through spreadsheets—clear visuals make it easy to explain where your business stands and where it’s headed.
Moving from Reactive to Proactive
Traditional financial reports often feel static. But with cash flow reports, especially when paired with forecasting tools, you can run scenarios and make proactive decisions. What happens if expenses spike? Or if sales drop? By anticipating these scenarios, you’ll be ready to navigate any challenges before they turn into bigger problems.
The bottom line
Mastering cash flow isn’t just about balancing numbers; it’s about steering your business toward growth with confidence. Visualizing your cash flow gives you the clarity to plan ahead, avoid any shortcomings, and make strategic decisions that keep your business on track.
At DiMercurio Advisors, we help you turn complex financial data into clear, actionable insights. Whether you’re growing, stabilizing, or simply looking for clarity, we’re here to guide you. Reach out today and let’s take control of your cash flow together.
