How Much Cash Flow Do I Need?

How Much Cash Flow Do I Need?

It’s a common question: How do I know how much cash I’ll need this quarter or next year? The answer is different for every business and situation, but can be made easier with a few simple strategies.


If you want to make good cash flow decisions, you are going to have to focus on good bookkeeping. You have to be able to get into your books and play with them. You must know what P&L looks like and what a balance sheet looks like. Your books should be your best friend when you are trying to make this decision.


To know your cash needs you have got to know your numbers. To help ensure that your business stays in the black, lets take the time to familiarize yourself with a few key financial terms I have revised from Julie Davis.


1. Cash Flow

This is computed by subtracting your operating expenses from the money your company generates during normal business activities. It includes depreciation to your net income and adjusts for working capital like receivables and inventory. When your operating cash inflow exceeds your cash outflow, this is a sign that you’re operating in the black. If the reverse is true, it’s time to take a closer look at your income and expenses.


Sufficient cash flow in your business checking accounts, especially payroll accounts, is critical. Small-business owners should always make sure they have the necessary cash flow to meet all monthly business expenses.


2. Net Income

This is closely related to cash flow. It is also known as your net earnings and net profit. This figure constitutes the result of subtracting all your expenses, including taxes, from your income. It’s not adjusted for items like depreciation. Like cash flow, your net profit is a good indicator of whether you’re earning or losing money.


3. Profit and Loss

This figure is found on what’s commonly known as your P&L statement, which is a snapshot of your company’s income (sales and revenue) minus expenses during a specific period of time, generally it is quarterly, every six months or yearly. Knowing your company’s profit and loss over time allows you to project earnings and make realistic plans for the future, both short term and long term.


4. Sales

Since generating sales is the reason entrepreneurs operate small businesses, this figure is critical on the number’s list. Keeping a close eye on sales is important, as a dip could be a warning sign of trouble. In the same respect, it’s important to pay attention when sales are up. Determining why business is good at the time your company’s on an upward trajectory is easier than trying to figure it out later. Reacting quickly to an increase in sales also allows you to determine what you need to keep doing to sustain that growth.


5. Price Point

As a small business owner, you should know exactly how much it will cost to purchase goods and then what you will need to sell those goods or services in order to make a profit. When you determine price point, make sure to take into account all overhead expenses, such as utilities, payroll and sales tax.


6. Gross Margin

Also known as your gross profit—and related to price point—this figure reflects how much money remains after the actual cost of your merchandise is subtracted from the selling price. If this figure is low and not sufficient to cover your operating costs, such as salaries, rent, marketing and utilities, then you’re likely not charging enough for your products and services.


7. Total Inventory

Monitor your inventory numbers on a weekly basis to ensure that the amount of inventory isn’t gradually increasing, as this could be a sign of sales trouble. By tracking inventory on a regular basis, you can spot problems early enough to avoid the negative effects of excess inventory, which include storage costs, reduced profits and potential waste.


To know your cash needs, get focused and in control. You will then never be caught off guard. It is not that hard because finances are learnable! You will sleep better and be happier, as well as have a glimpse of what the future holds for your business.

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