Holiday Cash Flow Lessons You Should Resolve To Follow

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Everything goes into overdrive during the holiday season when you’re a business owner — and the window of time you have to do everything somehow miraculously shrinks to become even smaller. 

The problem is, although Q4 can be a hugely prosperous season, it can also be a source of unusual cash flow patterns – which will turn into problems if you don’t understand what’s going on. Our data at PayPie shows that the average small business owner has a razor-thin margin of just $7 between their inflow and outflow, which means there’s little room for error.

Even if Q4 isn’t your high season, any seasonal business can learn cash flow lessons from its peak periods. This will let you leverage your strengths so you can make the most of every key season. 

Why cash flow changes during the holidays

To understand holiday cash flow lessons, you need the why. As an SME (small to medium-sized enterprise), there are a few core reasons why your cash flow might be far out of whack from normal during the holiday season. The same goes for any type of seasonal business during which a substantial portion of income is earned during key periods.

It takes money to make money

The holiday season is a peak time for retailers, ecommerce sites, restaurants, shipping, distributing, manufacturing and other industries.

While these are all different industries, one of the main the holiday cash flow lessons is that it requires a cash outlay in order to bring more cash in. The key is accounting for and managing these costs in order to stay cash flow positive. 

Business expenses that increase during the holidays

Expenses that can increase during the holidays

Here are just a few areas where expenses rise during a seasonal push:

Labor: As storefronts are open longer hours and distributors work overtime to fill orders, they need people to staff their operations. This is reflected in hiring spikes documented by U.S. Bureau of Labor Statistics data. Although seasonal employees are generally hourly workers who do not receive benefits, they still have to be paid. 

Inventory and materials: If you’re selling more during the peak season, you’ll need to make sure you can meet the demand for products. This means increased spending on raw materials, production runs, packaging and anything else needed to stock shelves or perform the services that your business provides.

Marketing and advertising: To drive people to spend at your business instead of your competitors, you might find yourself ratcheting up spending on marketing and advertising. Among higher spending during the peak holiday season, though, businesses will find higher costs for advertising, too. Competition for customers’ eyeballs online or in print drives up prices. During Q4, you’ll find higher CPCs (cost-per-click), which is how most platforms, including Facebook and Google, charge advertisers for acquisition. Your normal advertising campaign could cost an additional 25% – or more.

Space: As the trend of pop-up stores continues – what some call “nomadic retail” – many direct-to-consumer (D2C) ecommerce brands choose to rent space during the peak season. Not only is this an unusual, extra expenditure, but rent is at a premium during the Q4 shopping period.

Learn more: How to read a cash flow statement

Other factors impacting cash flow during the holidays

Just like you, other businesses whose peak seasons coincide with the holidays may also experiencing higher-than-usual expenses. Everyone is shelling out more, really — your customers included.

Look at the full scope of your business, from supply chain to transaction. For instance: Your suppliers are spending more on logistics to get their raw materials to you. You’re spending more to staff your operation to sell to customers and your customers are spending more in virtue of holiday season gifting.

In this circle, everyone has money they owe — and debt is higher.  If you have outstanding debt to collect before the holiday season begins, there’s a chance that your invoices may run past due. This will negatively affect your cash flow.
One of the most important holiday cash flow lessons is that if you’re running your business according to a cash flow forecast that doesn’t take into account past-due debts, you could find yourself at in the red during this crucial time – putting your business at unnecessary risk.

5 holiday cash flow lessons for smoother peak seasons any time of the year

Let’s mitigate cash flow disaster. We can break cash flow lessons down into a few sub-categories to keep your eye on:

Holiday cash flow lessons for sales

How can you make sure you make the most of your peak sales period. Here are two simple ideas:

Estimate sales. Use historical data from prior years in operation to create sales projections. This will help you understand the discrepancy between your expected increased expenditures and, hopefully, increased sales. If you don’t have strong records – or any records – consider asking professional trade associations to connect you with other business owners in your industry who might be able to help you craft realistic ideas.

Encourage presales. As one issue with holiday cash flow stems from debt collection, and another with lack of positive cash flow, presales can help address both of these issues directly. That means taking pre-orders for products (which can also help you avoid overproduction), pushing gift cards, or booking prepaid services. You might have to offer a discount or incentive to do so, but even a slightly reduced margin can be offset by ensuring sales and receiving cash faster.

Learn more: 10 best businesses for cash flow.

Holiday cash flow lessons for debts

Going back to it taking money to make money, you also need to watch what you spend while you’re capitalizing on the holidays or any seasonal period.

Track debt. You should always have a handle on your outstanding debt – not just when you pull your balance sheet quarterly. In the period leading up to and during the peak season; however, it’s especially important that you know who owes you money and if it’s past due. If the holiday cash flow lessons have taught us anything, it’s that the people who owe you money aren’t going to prioritize paying you during the holidays.

Incentivize payment. With that in mind, consider incentivizing those who do have outstanding invoices to pay you. If you can, you’ll want to start this practice well in advance of the holiday season. Although that’s not possible for all business owners, it’s a standard practice of trade credit (what you might know as “net terms”) to offer small percentage discounts to vendors who pay early. When everyone is worried about expenditures during Q4, you might be able to strike a deal.

Holiday cash flow lessons for once the dust settles…

At the end of it all, you want to be careful about how you manage cash flow throughout the year. As a seasonal business, the funds you just earned also have to fuel you through the leaner times as well.
Spend correctly. Sure, easier said than done. But if you find you’re in the black from holiday sales, use your profits wisely. Keeping in mind that you’ll likely spend the first few months after your high season collecting debt, put off reinvesting your profits into your business (or paying yourself or others out – understanding free cash flow can help). That buffer could very much come in handy if your payments don’t come in. Remember that positive cash flow is the main indicator of business health and that 60% of businesses who fail blame cash flow.

 

Learn more: 5 proven models for recurring revenue. 

Study cash flow closely and make the most of every lesson

The sum of these cash flow lessons should point to one thing: that you need a good way to manage your cash flow. The first thing that every business owner should be doing is making certain to run cash flow forecasts year-round to set themselves up for success in the holiday season – or whatever your peak season is.

It’s not weird quack stuff to say you need to “understand” your cash flow. We’re not talking about giving it therapy and asking it its feelings. It’s a question of studying daily and monthly patterns and understanding not only how your business spends, but also how you manage money.

The best way to get insights is to use an advanced cash flow management tool with those data points built in. PayPie integrates directly into QuickBooks Online (QBO) to assess your cash flow and key performance metrics —  giving you the insights you need to put your cash flow lessons to work for you.

Getting started is as easy as creating a PayPie account and connecting your business’ QBO account.

cash flow forecasting monthly projections

PayPie currently integrates with QuickBooks Online and was a 2018 Small Business App Showdown Finalist. 

The information in this article is not financial advice. This content is general while every financial situation is unique. It does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional. 

Stock image via Pexels. Santa copyright North Pole Enterprises 2018. 

Are You Doing SMAC?

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Small business accountants are becoming more tech savvy. So are the clients they serve. It’s not a perfect transition, but it’s happening. What’s next?

As technology solutions have become a must-have instead of a nice-to-have, more small to medium-sized accounting firms and businesses are utilizing the cleverly named SMAC system to drive business innovation and solve real-world problems.

At PayPie, we’re all about solving real-world problems, like cash flow. Here’s what we found out about the buzz everyone is feeling from SMAC.

What is SMAC?

SMAC stands for Social, Mobile, Analytics and Cloud technologies that help a business make the leap into the digital age. They are the building blocks of the internet of things (IoT) where technology has shifted from machines to the humans that use them.

Social

Social is just what you expected, all the main social media channels, Twitter, Facebook, LinkedIn, Instagram and SnapChat, along with the constant stream of newcomers.

The social media universe is a place where you can interact with customers and ‘listen in’ on what people are saying about your business and your competitors. A skillful use of social media can engage customers, build brand awareness and drive sales. A tone-deaf approach can have the opposite effect.

Mobile

Mobile consists of smartphones, tablets and other connected devices, like restaurant and retail point-of-sale (POS) systems. While phones and tablets help you access information from almost anywhere, they can also gather information through tools, like receipt scanners using optical character recognition (OCR) technology.

Analytics

By its nature, all this technology and technological integration create more data. The challenge and value come from turning this data into usable information. Think QuickBooks Online (QBO) and the business financial data collected from standard business transaction and other integrated applications. Then there are apps like PayPie that connect to QBO and provide powerful cash flow and financial analytics.

Cloud

The cloud is the glue that connects social, mobile and analytics. The mythical cloud hosts most of these online and mobile tools. It’s also the main conduit for sharing information between these technologies. QuickBooks Online is hosted in the cloud and so are the applications (apps) in its ever-growing ecosystem.

Read More: The Problem with Small Businesses and Accounting Technology 

Data Never Sleeps — Trends in Data

Why you should be doing SMAC

Longing for the days of the abacus? Your tribe is probably a very lonely place because tech is firmly embedded in the future of accounting. In fact, 80% of the highest performing accounting firms say adding value to existing clients is the most effective way to drive growth. Now that you know what SMAC is, here are a few ways you can apply it.

Build better relationships with social

A majority, 96% of small businesses use social media as part of their marketing efforts. According to Intuit’s Firm of the Future thought leaders, social is quickly becoming a vital sales and branding tool for accountants and bookkeepers.

Don’t overlook the importance of mobile

In the United States, 95% of Americans own mobile phones, 77% of which are smartphones. Some entrepreneurs even claim to run 100% of their business from their phone.

It’s no wonder there’s a growing number of accounting apps for smartphones, such as time tracking, scheduling, expense and mileage tools, just to name a few. Knowing which apps to suggest small business clients helps accountants fulfill their roles as advocates and fintech experts.

You can’t escape the cloud

In 2016, Intuit stated that there was a 41% increase in subscribers for cloud-based accounting software. The trend is pretty hard to overlook. One of the reasons that many small businesses (41%)  are choosing cloud accounting software is for the increased functionality.

The cloud not only increases access to information — from almost anywhere and any device — it also changes the way people connect. Face-to-face meetings are no longer a prerequisite to delivering value. Especially when you can have all the information you need lined up and ready to share via e-conference or e-mail.

Another benefit, when you combine cloud computing with automation, you eliminate a lot of the time-consuming manual tasks that once kept you from offering further analysis and insights.

Add value with analytics

By 2020, 1.7 MB of data will be produced every second for every living person. For small to medium-sized enterprises (SMEs), structured data, like entries in accounting software, only represent 20% of all data. The other 80% of the information, generated by smart devices and other technology, is considered big data or unstructured data.

However, even the term “structured data” is somewhat misleading as it still requires a sophisticated use of artificial intelligence (AI) and machine learning (ML) to provide meaningful analysis. As evidenced by the sheer number of analytics apps on display QuickBooks Connect 2018 in San Jose. It’s also why PayPie was named a Small Business App Showdown Finalists for its cash flow analytics.

Read More: 10 Reasons Accountants Should Offer Cash Flow Consulting 

Put an end to cash flow problems

For such an essential business concept, cash flow monitoring and forecasting can actually be a significant challenge for small businesses.

PayPie thinks it shouldn’t be this way, which is why we developed our cutting-edge cash flow projection and analysis tools. Our performance insights also provide a 360° view of financial health.

Getting started is as simple as creating a PayPie account and connecting a business’ QuickBooks Online account. Once that happens, our application takes this financial data and begins is assessments using hundreds of data points. Then all you have to do is click on the dashboard button to view a wealth of insightful charts and graphs that help make sense of cash flow and financial health.

Get started today! 

cash flow forecasting daily projections cash flow forecasting monthly projections

PayPie currently integrates with QuickBooks Online and was a 2018 Small Business App Showdown Finalist. 

The information in this article is not financial advice. This content is general while every financial situation is unique. It does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional. 

Stock image via Pexels. Infographic via Domo — Data Never Sleeps 6.0 (Email required for report download.) 

What Small Business Owners Want From Accountants

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This month Accounting Today released the results of its inaugural Small Business Accounting Insights Survey. This survey of more than 1,000 small business owners includes some positive news and some positively startling observations on what small business owners want from accountants.

If, like most of us here at PayPie, suspense just isn’t your thing, let’s start with the most shocking observation:

Nearly half of the small businesses surveyed don’t work with an accountant

We’ll give you a second to pick yourself up off the floor. It’s true, 468 of the 1,000 respondents said they hadn’t worked with an accountant in the previous year and were not likely to do so in the coming year. A direct quote from Accounting Today Editor in Chief Daniel Hood, “They literally can’t imagine how an accountant can help them.”

While you ponder this, here’s a bit of good news:

The small businesses that used accountants, loved their accountants

The 549 businesses that worked with accountants were quite happy with their accounting partners. Plus, the more services they were using, the higher the approval rating. The businesses that collaborated with accountants were also more profitable and experienced higher growth. In total 72% of the businesses who worked with accountants were very satisfied.

The opportunity — in terms of what small business owners want from accountants:

Accountants need to give small businesses more reasons “why”

I want my accountant to “take care of the financial side so I can focus on running the business.”
—Actual small business respondent

The biggest obstacle is that small business owners don’t know what they don’t know. It’s not their fault. Turns out that when you get the keys to a business, neither an MBA or CPA is automatically included. This means it’s up to accountants to give them the reasons why.

Small business owners need to be awakened to what a skilled small business accountant can really do for them. The narrow, limited understanding of what an accountant can actually do is the knowledge gap that needs to be leapt. Eyes need to be opened to the fact that accountants can do more than help you file your taxes.


The opening quote is true. Working with an accountant should make a business owner feel more confident. It should also make the business owner understand how fundamental this financial knowledge is to running their small business.

Read more: 10 reasons why accountants should offer cash flow consulting.

What do small businesses want from their accountants?

Most small businesses, 78%, want a trusted advisor. Someone who responds quickly, understands their industry, offers clear, reasonable pricing and uses plain language instead of accounting lingo. Trust me, the first time anyone sees the acronym “EBDIT” — they’re going to think you misspelled Fitbit. (Or maybe that’s just me.)

Trusted Advisor

What financial problems do most small businesses face?

Not surprisingly, the top challenge was cash flow problems. Other problems faced by small businesses included low profitability, the loss of a major client, the need for capital and too much debt. We know we’re “preaching to the choir” when we say that a majority of these things all tie back to cash flow.

For instance, if a business can’t fund its own operations well enough to meet the needs of a major client. Not to mention what the blow losing a client can deal to a small business’ bottom line. Or if cash flow isn’t managed properly, then debt will most certainly become a problem.

ness accounting problems

Notice how little these common financial issues have to do with filing taxes and looking for deductions?

The real opportunities lie in the kinds of advice only an accountant can give

The responses of trusted service and advice were a given. What was less than a given was an awareness of what kind of an advisor an accountant can really be.

Most respondents were unaware of value-added services like cash flow consulting that help a business understand the money it earns moves in and out of the business. Only 21%, a little less than 1/5 of respondents, turned to accountants for value-added services like business planning, which can include cash flow forecasting.


With small business survival rates being what they are, consider that those small businesses who forecast cash flow on a monthly basis have an 80% survival rate.

Read more: How cash flow consulting helps small businesses

services like cash flow consulting

Everyone understands the concept of making money. What they often fail to comprehend is the timing of it all. That your accounts receivables need be in synch with your accounts payable. Or, even that accounts receivable and accounts payable are two different things.

Cash flow consulting that includes analysis and forecasting helps businesses make better short- and long-term decisions. It helps them know if they can afford to hire new employees or invest in other growth opportunities. Routine analysis can also help pinpoint opportunities to cut costs or improve income.

Automation helps, but only accountants can advise

With cloud-based accounting software, like QuickBooks Online and its diverse ecosystem of apps, you can automate many of the manual, data-entry functions that no one — not you or nor business owners — even like to do.

With simpler solutions for expense management, invoicing and other previously time-consuming tasks, now there’s more time to focus on advocacy and building deeper relationships with business owners through services like cash flow consulting.

Get easy, insightful cash flow analytics

Another plus for accountants and the small businesses they serve is that more and more advanced analytics solutions are being developed to take the data within the business’ accounting software and make it more usable and meaningful.

This is exactly what PayPie’s analytics do. Once you connect a business’ QuickBooks Online account, our proprietary algorithms comb through the data to create a cash flow analysis that includes monthly and daily cash flow projections and detailed breakdowns of receivables, payables, income and expenses.

cash flow forecasting daily projections

Make your small business clients’ cash flow data easy to present, understand and discuss. Try PayPie today.

PayPie currently integrates with QuickBooks Online and was a 2018 Small Business App Showdown Finalist. 

The information in this article is not financial advice. This content is general while every financial situation is unique. It does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional. 

Stock image via Pexels. Survey results via Accounting Today.

The Problem with Small Businesses and Accounting Technology

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Accounting technology has come a long way since the dawn of time. While it took thousands of years to go from clay tablets to iPads, modern accounting software has evolved at the speed of light. In less than 30 years we’ve moved from early enterprise resource planning (ERP) systems to the versatility of the cloud.

What does this mean for the average small business? Unless you own an accounting or bookkeeping business, it’s not likely that a spreadsheet is your spirit animal. However, cloud-based software-as-a-service (SaaS) applications, like PayPie, have made it easier for small businesses to harness the benefits of automation.

The problem is many small businesses are not only time-starved —  they’re somehow missing out on the time and money they could save by adopting accounting technology.

Industry surveys indicate small businesses aren’t keeping up with the pace

According to the good folks at the GetApp Lab, we’re currently in the “Age of Intelligent Accounting.” We’re living in a time when technology lets you easily forecast cash flow, automate data entry, improve processes and securely share data.

age of intelligent accounting

Yet, a FitSmallBusiness study of 293 small business owners found that no single form accounting software, in any category, had a usage rate of 50% or more. The only category that came close was general accounting software with 49.8%. In fact, most categories came in at 40% or less.

QuickBooks found similar results when it surveyed 400 small business owners with 20 employees or less. Most spent more time than they’d like on back-office operations, such as accounting, administrative tasks, bookkeeping, inventory and accounts receivable. Furthermore, only 30% of these small businesses considered themselves “highly automated.”

Why aren’t small businesses adopting accounting technology at historic rates?

Most small businesses said cost was the main reason they weren’t using small business accounting software and other accounting technology. The irony is that these tools are often quite affordable. For instance, the “Simple Start” version of QuickBooks Online is $20 USD a month and there are often sign-up promotions.

Then there’s the simple fact of valuing the time and the savings gained by preventing costly mistakes. Every hour that a business spends on a process that could easily be automated is an hour that’s lost toward growing the business. An hour spent each day on updating a spreadsheet adds up to 5 to 7 hours a week or 20 to 28 hours a month.

Mistakes also cost time and money. Any business that files its taxes late without filing an extension, will be fined. The longer the problem goes unsolved, the more interest and penalties accrue. Without proper processes, solving the problem is also harder. Any mistake that goes unresolved can easily snowball into a spiral of despair.

Pro Tip
In most cases, the costs of accounting software and related accounting technology are tax deductible in both the United States and Canada.

The times are changing and so should small businesses  

Within the next few years, 80% of accounting and finance tasks will be automated. If you take the literal translation of few as three years, this is soon, very soon.

It doesn’t mean the robots will take over. What it means is those small businesses who embrace process automation by using cloud-based small business accounting software and the ever-growing ecosystem of apps will:

  • Reduce errors by up to 95%.
  • Make some processes up 4 times faster.
  • Gain cost savings of up to 80%.

“Cloud accounting automation capabilities will significantly streamline internal operations. This lowers the risk of data loss and miscommunication. And given the technology’s low cost of entry and maintenance, its return on investment cannot be ignored.”
—Tammatha Denyes, TD Accounting Services, 2018 QuickBooks Firm of the Future Runner-up

Where small businesses can leverage accounting technology

According to small business owners themselves, they spend too much time on accounting, bookkeeping, administration, inventory and chasing payments. However, they’d rather be spending more time on things like building their teams and marketing their products and services.

tasks with too much time

Going back to the costs of failing to automate:

  • 70% of small businesses aren’t using apps to help them automate scheduling — which not only wastes time, it puts these businesses at risk of violating labor laws and increasing turnover.
  • 60% of small businesses aren’t automating their payroll — let’s just say that in the history of bad ideas, this is one of them. Hello, tax laws anyone?
  • Only 21% of small businesses have integrated their accounting software with invoicing apps — considering late payments are a top business concern and cash flow headache, this should be a “no-brainer.”

Any small business accountant or bookkeeper reading this piece is probably saying, “Yes, yes, yes!” to all the points above. But how do we turn the tide and get small businesses to take advantage of the simplicity and effectiveness that accounting tech offers?

The role accountants and bookkeepers play

“We can consult with our clients to help them solve their pain points as they occur and make real-time changes to their business. This makes us more valuable than ever before.”
—Tanya Hilts, Cloud Bookkeeping Services, 2018 QuickBooks Global Firm of the Future Winner

Once a business works with an accountant and/or bookkeeper, they quickly see the benefits of this relationship. From complying with tax and labor laws to setting and achieving financial goals, there are no better advocates than small business accountants and bookkeepers.

As the people establishing financial processes, accountants and bookkeepers have a unique opportunity to get small businesses using accounting technology. Many financial professionals have their core go-to apps that they often recommend to businesses. Slowly but surely, this is how the bridge will be gapped.

When you consider that 40% of small businesses claim that doing their own bookkeeping and taxes was the worst part of being a small business owner and another 64% do their bookkeeping by hand, it’s easy to see where the opportunity lies.

It’s all about empowerment

“With every new client we bring on, my primary missions are the same: to make their financial processes easier and to help them reach their financial goals.”
—Michael Ly, Reconciled, 2018 QuickBooks US Firm of the Future

At PayPie, we’re 100% behind empowering accountants, bookkeepers and small businesses. It why we’ve developed our risk assessment and cash flow tools and why we’ve invested in creating useful, informative and actionable content in our blog.

Just as businesses benefit from automation, so do accountants and bookkeepers. There’s no need to spend hours building custom reports. Grow into your role as an advisor and advocate by helping businesses see the big picture with PayPie.

Trying our powerfully designed and intuitive analytics is as simple as creating a PayPie account then connecting a business’ QuickBooks Online account.

Main analytics dashboard

PayPie currently integrates with QuickBooks Online and was a 2018 Small Business App Showdown Finalist. 

The information in this article is not financial advice. It does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional. 

Stock image via Pexels. Age of Intelligent Accounting infographic via GetApp. Table of back-office tasks via Intuit QuickBooks. 

Forecasting Cash Flow in QuickBooks Online

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The average small business owner might not be as familiar with cash flow as they should. However, if you’ve got an awesome accountant and/or bookkeeper on your side, they can wax poetic on the virtues of a good cash flow projection.

Once a business starts forecasting cash flow, they’re quickly inspired and empowered by the insights it provides. This is why PayPie has included both monthly and daily cash flow forecasting within its analytics dashboard.

Accountants and bookkeepers who use QuickBooks Online (QBO) know that the Cash Flow Projector tool is only available within QuickBooks Desktop. But hope is not lost! In this article, you’ll learn how to use PayPie to project cash flow by simply connecting a business’ QBO account.

Creating a cash flow forecast in QBO

Put down the pen and paper. Forget about opening Google Sheets or Excel. Simply sign up for PayPie, then connect the business’ account. Forecasting cash flow is really that easy.

The app will then do a deep dive on the business’ financial data, looking at hundreds of variables. (And we’re just getting started…) The assessment of these variables is then presented in a unique analytics dashboard, with all of the cash flow metrics detailed in the cash flow tab.

main dashboard cash flow tab

Learn more about the PayPie QBO integration

Forecasting cash flow — monthly projections

The data for the monthly cash flow forecast pulls from the company’s income statement, balance sheet and cash flow statement. The graph shows three months of actual cash flow and another six months of forecasted cash flow. The forward-looking projections are based on the numbers from the previous three months.

Cash flow is broken into the three main categories:

  • Operating cash flow — inflows and outflows related to the sale of goods and services.
  • Investing cash flow — inflows and outflows that stem from the sale or purchase of capital investments.
  • Financing cash flow — inflows and outflows from borrowing activities or external investors.

Monthly changes in cash flow also helps identify patterns in order to leverage peaks and overcome the valleys.

cash flow forecasting monthly projections

Forecasting cash flow — daily projections

The daily cash flow projection shows the beginning and ending cash balance for each day — based on current and previous data in the business’ main financial reports.

Daily projections help you get more granular in your cash flow analysis. For example, a pattern of negative cash flow days can help pinpoint if a business is giving their vendors more time to pay than their debtors are giving them.

cash flow forecasting daily projections

5 reasons to use PayPie for cash flow forecasting.

Analyzing cash flow — accounts receivable

Receivables and payables are key components of cash flow. With PayPie you can generate an assessment of each one. Assessing accounts receivable helps identify overly generous credit terms and outstanding invoices that negatively impact cash flow and a business’ overall financial health.

In the accounts receivable analysis, you’ll be able to quickly access:

  • Total invoices raised — for a period of 12 months, regardless of whether the invoices are open or closed.
  • Monthly invoices, payments and open AR — laid out in a convenient bar graph. (Open AR = (previous month’s open AR + current month’s invoices) – payments.)
  • Top five exposures — showing which customers represent the highest amounts of outstanding invoices.

accounts receivable

Analyzing cash flow — accounts payable

Just as accounts receivable shows inflows, accounts payable details outflows. Crucially, if there are late payments which affect the business’ short- and long-term credit profile, as lenders base their conditions on previous payment histories.

The accounts payable analysis features:

  • Total bills received — for a period of 12 months, regardless of whether the bills are paid or unpaid.
  • Monthly bills, payments and open AP — laid out in a convenient bar graph. (Open AP = (previous month’s open AP + current month’s bills) – payments.)
  • Top 5 exposures — showing which vendors represent the highest amounts of outstanding bills.

accounts payable

Comparing income to expenses

In order to provide a historical and top-level perspective, PayPie also graphs total income and expenses for a period of 12 months. This yet another way to highlight trends, such as when expenses either exceed or come close to surpassing income.

income and expenses

Generating a breakdown of expenses

Delving further into examining cash outflows, PayPie’s cash flow analysis also breaks down expenses on a monthly basis, displaying 12 consecutive months. It’s a quick way to provide a snapshot of a business’ main expenses throughout the year.

expense breakdown

Handy reference — basic cash flow terms and concepts.

Creating a cash flow statement in QBO

If all you want to do is create a cash flow statement, simply go to the QBO reports tab and select “statement of cash flows.” However, why have just a cash flow statement when you can have a comprehensive cash flow forecast? Plus, our dashboard includes a cash flow statement as well.

cash flow statement in dashboard

Assessing credit risk

The main question that PayPie’s financial analysis answers is, “How does my business look in front of lenders?” We provide insights into cash flow as it’s closely tied to determining the business’ ability to manage its finances and credit.

However, our algorithm also examines a range of variables related to risk in order to create a proprietary risk score. Unlike traditional credit scores, it’s based on a business’ own real-time accounting data, instead of third-party sources. It doesn’t replace a traditional credit score. Instead, it serves as an internal benchmark of how the business is currently performing.

If a business is planning grown and knows that it’ll need funding in the future, it can use the risk score and the insights from the assessment to be better prepared when applying for financing.

risk score

Taking action through insights

If you’re taking the time to forecast cash flow and evaluate risk, you’re already interested in troubleshooting. But you’re also interested in solutions as well. This is why PayPie also includes a list of targeted insights, that pinpoint problem areas which need to be addressed.

These insights into financial health and borrowing capacity include:

  • Cash flow coverage ratio — the ability to pay interest and principal amounts on borrowed funds.
  • Creditor days — the average amount of time needed to settle debts with trade suppliers.
  • Current ratio — the ability to meet short-term debt obligations within the next 12 months.
  • Debt-to-equity ratio — shows how much debt is used to run the business as well as the value of the assets compared to the debt.
  • Debtor days — how long it’s taking to collect payment from debtors.
  • Interest coverage ratio — determines how easily a business can pay interest expenses on outstanding debt.
  • Leverage ratio — how much operating and financing leverage a business has in order to manage debt or acquire additional funds.
  • Net worth — the total value of the assets after all debts are paid.
  • Return on capital employed — how well a business’ capital investments are paying off.
  • Revenue growth — compared year over year.

insights (2)

Start forecasting cash flow today. Sign up for PayPie and connect your business.

PayPie’s cash flow forecasting is currently free. In the future, each user will be limited to two businesses. Volume pricing for accountants and bookkeepers will also be introduced.

In the meantime, try it out and let us know what you think. We mean it, we value your feedback.

QuickBooks and QuickBooks Online are registered trademarks of Intuit Inc. PayPie integrates with QuickBooks Online. It does not integrate with QuickBooks Desktop. 

The information in this article is not financial advice. It does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional. 

Stock image via Pexels. App images via a PayPie demo account. 

Is Creditworthiness a Real Thing?

creditworthiness handshake

The amount of financial jargon you see as an entrepreneur is dizzying. You’ve got to worry about your accounts payable, accounts receivable, cash flow, and more. That’s not even getting into the world of acronyms, such as EBITDA, P&L, and other gems. With so many strange and different words in the financial universe, you might be wondering if “creditworthiness” is even a real word.

Truth — it’s very real and really important to your business. Creditworthiness is the sum of many factors, which is why PayPie has created a proprietary risk assessment to help you answer the question, “How will my business look whenever I apply for funding?” As a reflection of your financial health, here’s what you need to know about what goes into determining how lenders see you and your business.

What is creditworthiness?

Creditworthiness isn’t a specific statistic about a company’s financial health, unlike some other metrics, like a business credit score. Rather, it is a valuation that lenders perform in order to determine if borrowers may default on their loan. A lender determines creditworthiness by evaluating several financial figures, which shed light on a business’ overall ability to take on and repay its debts.

The reason lenders care about creditworthiness boils down to risk. Lenders aren’t fans of risk.  They want to be as certain as possible that their borrowers can afford to repay the money they’re lent, plus interest and fees.

There’s always some risk that a borrower might default, and no one is a psychic, of course. But lenders want to do as much research into their applicants as possible to minimize this possibility.

Your past credit and future creditworthiness 

That’s where credit and credit history come in. Lenders will look into your finances to see if there are any red flags — things like late payments, the amount of money you have charged versus how much credit you have available, defaults, insolvency, or poor cash flow could signal that you’re a riskier borrower than they might like.

The relative importance of your business’ creditworthiness varies depending on the kind of loan in question. For example, a longer-term loan may require a much higher creditworthiness threshold than an equipment loan.

The reason for this is term loans come with bigger financial obligations and longer repayment schedules, whereas equipment loans are self-collateralizing and banks can easily sell the machinery purchased with the loan to recoup their money. The importance of your creditworthiness might shift depending on what kind of loan you pursue.

What determines creditworthiness?

Your creditworthiness may not boil down to a certain score alone. However, lenders look at several financial figures to help determine their decision. Most of these figures, perhaps unsurprisingly, relate to your company’s credit. But there’s more to creditworthiness than a credit score. Here are a few of the core elements and how they affect the ways that lenders make their decisions.

The 5 C’s of credit

The 5 C’s of credit are perhaps the biggest determinants of your creditworthiness. They account for five key components of your business’ borrowing history:

  • Character: Your company’s character focuses primarily on your trustworthiness and acumen as a borrower. This includes your track record of paying back debts, be they through credit card balances or previous loans. But that’s not the only factor. Lenders also want to know more about your business experience, financial know-how, education, and professional accomplishments. Achievements, like having previously built a successful business or holding an MBA from a top university, are considered “experiential” assets.
  • Capacity: Capacity looks into your company’s cash flow to determine if you have enough money coming in and going out to make repayments feasible. Lenders don’t want to give money to a company that doesn’t look like it can make consistent repayments. Your capacity shows them whether or not your business can. Capacity decisions also include the amount of time your company’s been in business. (This is an area where newer business’ struggle, but it can be overcome with a solid business plan and strength in the other C’s)
  • Capital: Lenders love to see business owners who have put some of their own skin in the game. Capital reflects the amount of your own money you’ve invested in your company, which demonstrates how financially invested you are personally in its success. Lenders don’t want to be the only ones taking on risk when they put their cash on the line to help you fund your business.
  • Collateral: Collateral is the amount of cash you can put up to secure a loan. Most loans require some amount of collateral for approval. This is because lenders want to know that you have something to provide them in the event that you default on the total balance of your debt. Some loans do not require collateral, such as equipment loans, as the equipment itself serves this role instead (i.e. lenders can sell the items purchased to recoup their losses).
  • Conditions: The purpose of your loan plays a large factor in your creditworthiness since there’s more risk involved in certain ventures than others. For example, if you intend to use your loan to buy raw materials or inventory, this is a safer “more tangible” purpose than a new ad campaign, which may not necessarily reap direct financial dividends. Most lenders would rather you use their money in ways that have a direct impact on revenue.  Conditions help them make this decision.

Read more about the 5 C’s of credit.

When your personal credit comes into the picture…

Your company’s creditworthiness decision comes from a few data sources. Most relate to your business, but your personal finances can also play a significant role. Especially if your business is new and doesn’t have a detailed financial history. If that’s the case, lenders will look toward your personal credit history to get a better projection of your track record with debt.

When lenders evaluate your personal credit history, they focus on a few specifics. Chief among them is your credit report, which offers a snapshot of your debt history. Your credit report reflects how well you pay off your debt, as well as your credit utilization (the amount of credit you use out of the total amount offered to you). The better your credit score, the more likely lenders are to approve your business loan. They view your personal use of credit as an indicator of how you’ll handle business debts. The stronger your personal credit history, the better.

Your business credit history

Your business may already have enough credit history to have its own credit score. If so, that’s a great addition to your application, and can help improve your creditworthiness if your score’s a good one.

Business credit scores are similar to their personal counterparts, as they evaluate your company’s history with credit, as well as its credit utilization. Business credit reports also factor for industry-based credit risks as well, however. If your industry is subject to market volatility or has recently seen a large number of bankruptcies, your credit report may suffer.

Your creditworthiness and financial health.

Creditworthiness tells a story that all lenders can understand

Your ability to get a business loan or any form of business financing hinges on your creditworthiness. It is an objective, universal measurement of your company’s history (and your personal history) with money. The same factors go into measuring your creditworthiness as any other business — which means that it serves as the baseline method of determining a company’s attractiveness to lenders.

Credit scores may change depending on the reporting agency, and every business’ mission statement is unique unto itself. But creditworthiness accounts for these differences by objectively evaluating the total picture of a borrower.

How cash flow affects creditworthiness

One major factor that has a cascading effect on creditworthiness is cash flow. With a solid cash flow, you can pay your debts on time, expand your revenue, and prepare for the future. Without understanding the ins and outs of this vital metric, you’ll miss payments and mismanage your money — which is a recipe for credit disaster.

A reliable cash flow forecast helps you take control of your cash, your debts, and day-to-day finances. This is why we include both a monthly and daily cash flow forecast within our analytics dashboard. You also receive a targeted list of actionable insights to help you improve your business’ creditworthiness.

insights

Get the tools to measure and build creditworthiness. Connect your business with powerful, intuitive analytics and insights.

PayPie currently integrates with QuickBooks Online and was a 2018 Small Business App Showdown Finalist. 

The information in this article is not financial advice. It does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional. 

Images via Pexels. 

COGS: What it is and How it Works

Cost of Goods and Services

Small and medium-sized enterprises (SMEs) are always on the lookout for ways to maximize profits. The cost of goods sold (COGS) is a great place to start, as this figure includes a key expense: the cost of labor. If you’re manufacturing your products, in addition to selling them, your COGS impacts your financial health.

Knowing your COGS helps you find inefficiencies throughout different parts of your business. Perhaps you’re paying too much for manufacturing and could find alternative means of making your products. Or maybe your labor costs are too high and there are ways for you to make your workforce leaner.

All of these common COGS factors have a huge impact on the way you do business, especially with regard to cash flow. Since cash flow is the backbone of your day-to-day operations, you’re going to want to make sure you can stretch your liquid assets as far as they’ll go. Maximizing your COGS helps improve your cash flow, risk profile and ability to secure business financing whenever you need.

Read more: The 5 C’s of Business Credit 

What is COGS and why is it important?

COGS is, at its core, a measurement of how much it costs for you to make your product or provide a service. This figure goes beyond simply tracking how much you spend on raw materials since that only tells one part of the story. Instead, COGS tracks the cost of materials as well as the labor associated with production. It measures any direct costs in materials, purchases and labor that went into creating a product or service during a specific period. 

Your COGS is important for three major reasons: tax reporting, growth opportunities and, profit tracking. COGS helps you accurately track your sales when tax time comes, which helps make sure you claim the most deductions and pay the right amount of tax.

This number also helps you determine which items sell better than others and where you might be able to reduce manufacturing costs. (If they’re out of sync with other products.) Lastly, COGS helps you track profits by giving you a foundational understanding of how much it costs to produce your goods.

cash flow consulting stock image

How to calculate your COGS

Avery’s Amulets is a little shop on Main Street that’s devoted to all things baubles. She has more than $3,000 worth of jewels in inventory at the beginning of the year. She also makes an additional $1,500 worth of goods throughout the year. That means that Avery has $4,500 worth of stock. Avery’s Amulets amasses an astounding amount of sales that leaves her with only $430 worth of inventory by the end of the year.

Avery adds it all up with the following formula:

Beginning Inventory ($3,000) + Additional Inventory ($1,500) – Ending Inventory ($430) = COGS ($4,030)

Therefore, Avery’s COGS for the year is $4,030. This means, in the next year, she knows that it will take a minimum of $4,030 to produce the same amount of goods. Unless she’s able to find efficiencies or there’s a rise in the cost of materials or labor that’s simply beyond her control. 

How to control your COGS

Avery wants to bring her COGS to heel — namely, she wants to reduce her labor costs per item. This would help dig her out of a cash flow issue since the bauble business requires a ton of up-front payment for raw materials.

Avery might be able to find savings by automating some of her work, so she buys the Recom-bauble-lator 3000, which lets her build baubles in a fraction of the time. This helps her reduce labor costs, since she no longer needs to employ part-time employees to help her out.

This is only one way to control COGS. The other is buying materials at a better price. Avery doesn’t want to make the investment in a Recom-bauble-ator 3000 and would rather be loyal to her employees. Preferring a human touch, she works out new terms with her gold supplier, which gives her better bulk pricing to produce a bevy of baubles for less money. This helps her reduce her COGS by lowering materials cost.

Learn the Difference Between Personal an Business Credit

Why controlling COGS is key to cash flow

Buying equipment and paying to put it together isn’t cheap. Any time you pay more than you need to when creating inventory, you leave money on the table. Keeping track of COGS can help significantly here. It provides you with clues on where you can minimize costs and optimize your company’s operations.

Keeping costs down helps free up cash. Which, in turn, helps you keep your cash flow steady. The more you can free up cash, the better your cash flow gets. Having your COGS at the ready helps you determine where your company is making the most of its available cash, and where there might be a drain on resources.

To get a further handle on your business and its financial health, you can connect your QuickBooks Online account to PayPie to get a detailed assessment of how banks, online lenders and other businesses view your business in terms of risk. Cash flow is definitely one factor, but our tool also combs through your transactional data to give you a near-real-time answer to the question, “How do lenders view my business?”

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Get started today! Create your account then connect your business in just a few clicks. It’s that simple.

PayPie currently integrates with QuickBooks Online. Additional integrations are coming soon.

This article is informational only. It is not financial advice. It does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional.

Images via Pexels.

What Your Cash Conversion Cycle Means For Your Business

cash conversion cycle

Running a business is all about making investments of time and money in exchange for a return on your efforts. But, if it takes too long for you to generate sales, you risk running out of cash. Or, if your production process takes too long, you risk leaving potential sales on the table.

The cash conversion cycle demonstrates how many days it takes for you to turn your investments in whatever it takes to create your products or services into cash flows from sales. It also helps measure how long it takes for you to see a return on your investment and can even help you spot inefficiencies along the way.

Because your cash conversion cycle (cash to cash cycle) helps tell you how much cash you need to fund ongoing operations, it’s instrumental when forecasting cash flow. Knowing the mechanics of your cash conversion cycle and using PayPie to forecast cash flow helps you see how efficiently you’re running your business and better anticipate your financing needs.

What is a cash conversion cycle?

You don’t need an MBA to decipher the benefits of increased sales. However, in the real world, you have to account for the amount of cash you have on hand to invest in inventory, employees, manufacturing, and the other costs of doing business.

Here’s where the cash conversion cycle helps. This measurement shows you how long you’ll go between making an investment in creating a product or service and turning it into a sale. Whether you buy inventory on credit or pay out of pocket or sell products on credit or cash-on-delivery, you can use the cash conversion cycle to measure how long it takes to turn your investment into an actual sale.

Your cash conversion cycle measures exactly how long it takes for you to turn investments into cash. This helps you make smarter financial decisions about inventory, sales, and pricing. A faster cycle means you’re churning out product as fast as you can sell it. A longer cycle means you’ll have to be a bit more careful about how you invest your money in inventory and expenses.

Learn how to read a cash flow statement. 

cash conversion cycle and cash flow

How to calculate your cash conversion cycle

Barry owns a ball bearing company. He wants to determine how long it’ll take for him to turn his investments in inventory and manufacturing into sales. The best way for him to do this is by calculating his cash conversion cycle —the time it takes between the outlay of costs to produce and when they’re sold.

To figure out his cash conversion cycle (CCC), Barry has to calculate several underlying components first: days sales outstanding (DSO), days inventory outstanding (DIO), and days payables outstanding (DPO).

With these numbers in hand, he can use this formula to figure out his cash conversion cycle:

CCC = DSO + DIO – DPO

Days Sales Outstanding (DSO)

DSO (days receivable or average collection period) reflects how long it takes for your customers and clients to pay their bills. The higher your DSO, the longer you go without getting paid for your sales. This can adversely affect your cash conversion cycle (and cash flow) since it means you have to wait longer to get a return on the money you’ve invested in making the product sold.

Days Inventory Outstanding (DIO)

Your DIO (days in inventory or days inventory) reflects how long it takes for you to sell an inventory item. The smaller your DIO, the faster you’re moving products. It also helps you determine how long it takes to convert investments into cash by reflecting the waiting period between your investments in inventory and how long it takes to sell the items.

To determine your DIO, you have to make two other calculations. You’ll want to determine your average inventory and cost of goods sold (COGS).

Average inventory lets you know the amount of unsold inventory you have at the end of every period. COGS lets you determine how expensive it is for you to create an inventory item. Here’s more on each:

Average Inventory

Average Inventory measures the number of goods sold during a specific time period. Common average inventory measurements track two concurrent periods, providing you with insights into how long your products sit in the warehouse.

This figure helps you determine how quickly you’re able to move products — the more inventory you have at the end of the period, the slower your products move. And, inevitably, the longer your cash conversion cycle.

To calculate your average inventory, add the total value of your inventory for two or more periods, then divide by the total number of periods included.

For example, Barry has $10,000 in inventory left over at the end of September. He has $9,000 left over at the end of October. So Barry would add $10,000 and $9,000, then divide this figure by two. His Average Inventory is $950.

($10,000 + $9,000) ÷ 2 = $950

COGS

Your COGS represents how much it costs to acquire or manufacture goods during a particular period. This figure tallies up the cost of the inventory, labor and any other expenses that relate to producing a single unit of your merchandise. Think of this number as the underlying figure you have to factor into your sales price in order to cover the money you spent to produce something.

Barry wants to determine his COGS, so he collects information about his raw materials, labor, and other expenses. His inventory costs $5,000 per month, additional inventory purchases during the period ($750), and the remaining inventory at the end of the month ($1,500). Barry then adds his beginning inventory ($5,000) by the purchases made during the period ($750) minus his ending inventory ($1,500).

($5,000 + $750) – $1,500 = $4,250

With these average inventory and COGS in tow, you can now determine your DIO. For example, Barry has an average inventory of $950, which he then divides by his COGS figure of $4,250, broken out by day (roughly $141 per day on a 30-day cycle). His DIO is 6 days.

$950 ÷ ($4,250 ÷ 30) = 6.37 (rounded to 6 days)

Days Payables Outstanding (DPO)

DPO indicates how long it takes for your company to pay its bills to suppliers and vendors. You can calculate this figure quarterly or annually, depending on how detailed you want to get with your company’s cash outflow figures. The higher your DPO, the longer it takes for your company to pay its bills. A high DPO means you might have more financial wiggle room for making purchases (if you don’t have to pay vendors quickly), but could also indicate that you’re not paying vendors on time.

Adding it all up

Barry’s DSO is 45 days, his DIO is 6 days and is DPO is 30. Using the formula: 

CCC = DSO + DIO – DPO

21 = 45 + 6 -30

Barry’s CCC is 21 days.

This means it takes Barry 21 days to go from production the production of goods to sales. By knowing where he stands, Barry can compare his metrics to benchmark standards for other ball bearing manufacturers. Internally he can also use his CCC as an internal reference point.

If he’s able to generate enough cash flow to make a profit and keep his operations humming, he knows that 21 days is a good CCC target. If this slips for any reason, he knows which factors to examine. When he wants to grow his business, he can look for further ways to optimize DSO, DIO and DPO.

Learn why you need a cash flow statement and cash flow forecast.

Why the cash conversion cycle matters

The cash conversion cycle helps you determine how much money you can afford to reinvest in inventory. The underlying calculations can also help you spot inefficiencies from delinquent payments from customers, paying your own invoices too quickly, or letting poorly selling products languish on shelves for too long. All of these factors affect your cash flow and the money you have left to grow your business. 

Whenever you need to apply for business financing, lenders will also look at your cash flow and cash conversion cycle in order to determine your ability to pay back the funds and on what terms. As you see that it took nearly  1,000 words to walk you through one calculation, that’s why PayPie has created a one-click risk assessment that includes cash flow analysis forecasting.

With PayPie, you can use your own financial data, the information you already have in your QuickBooks Online account, to generate your nearly real-time risk assessment and cash flow forecast. Get started today!

main dashboard

Create your PayPie account, connect your business and let our analytics dashboard do the rest.

PayPie currently integrates with QuickBooks Online. Additional integrations are coming soon.

This article is informational only. It is not financial advice. It does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional.

Images via Pexels. 

PayPie’s QuickBooks Integration – What You Need to Know

PayPie QuickBooks Online Integration

They’re not media darlings or mythical unicorns, they’re the hard-working people giving everything they’ve got to make their businesses a success. In fact, 99% of all the businesses in the world are small businesses.

In spite of their diligent efforts, 60% of small to medium-sized enterprises (SMEs) that fail point to cash flow. There’s also lack of funding to bolster cash flow with 1 in 5 SMEs being turned down by banks and traditional lenders. What’s worse, is that many SMEs don’t know the reasons why or even how to improve their chances.

The power of a one-click risk assessment  

There’s no question that QuickBooks Online is a smarter business tool for the world’s hardest workers — small business owners. That’s why PayPie is excited to integrate with QuickBooks Online to offer these businesses powerful, intuitive, one-click risk assessment — based on a business’ own first-hand accounting data.

While expense tracking, payments and other day-to-day business functions can be easily automated, if an SME wants to know their business credit rating, they have to rely on an outdated system based on second-hand information. That is, until now.

With PayPie all you have to do is create a PayPie account, then connect your QuickBooks Online account. It’s that simple and your near-real-time credit score will be generated in seconds.

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Hundreds of variables, one concise indicator

PayPie analyzes the financial data in the business’ QuickBooks Online account. Our application sorts the data into key variables and indicators, which are then further divided into two main categories — risk assessment and cash flow analysis.

The risk score, the focal point of the dashboard, is a capstone or synthesis of all the risk assessment variables. Like a car odometer, the risk score shows if the business is accelerating, resting at a comfortable cruising speed or losing momentum.

The table below breaks down some of the variables and indicators that PayPie uses to assess risk — factors that small business lenders often use their own assessments:

elements of risk assessmen

The added value of cash flow forecasting 

Risk assessment is to cash flow as a chicken is to an egg. You can’t have one without the other. Businesses need cash flow to survive. As such, they need to be aware of exactly how and when the cash flows in and out of their business. Cash flow forecasting also helps businesses predict when they’ll need funding — letting them plan and prepare to apply for these funds more effectively.

PayPie helps SMEs monitor cash flow by:

  • Detailing accounts receivable and payable exposures.
  • Comparing income to expenses.
  • Analyzing categories of expenses.
  • Projecting monthly cash flow.
  • Providing a daily cash position.

AR days overdue

Daily cash flow forecast

Learn 5 reasons why you should use PayPie for cash flow forecasting

Risk assessment that includes solutions

In developing their analytics dashboard, PayPie didn’t want to provide just a series of charts and graphs alone. They also wanted to offer solutions. This is why each assessment also includes a list of insights that show businesses which goals they’re achieving and where they’re reaching their goals and where they can improve.

Our insights that help SMEs improve their financial health and increase their chances of getting the funding they need include:

  • Evaluations of key liquidity ratios.
  • Comparisons to industry benchmarks.
  • Generation and investment of operating cash flow.
  • Debt and repayment indicators.
  • Return on capital employed.

risk assessment with insights

Financial tools for businesses, accountants and bookkeepers

Any business, accountant or bookkeeper using QuickBooks Online can use PayPie’s risk assessment and cash flow forecasting. We want to put these tools into the hands of the people who need them the most — whether it’s the businesses themselves or the financial professionals who consult and advise them.

Unless you’ve been stranded on a desert island or huddled in a safe room, you know that technology is set to transform accounting. This “Fourth Industrial Revolution” will also change the relationship between accountants, bookkeepers and businesses.

When all the basics are covered and simplified by automation, there’s more time to focus on conceptual and insight-based tasks, like cash flow consulting. The more businesses know about their current and future cash flow, the more able they are to make strategic, data-backed decisions.

Learn more about how cash flow consulting benefits businesses and accountants alike. 

Look better in front of lenders.
Improve your cash flow.
Grow your business.

“Every day, small businesses struggle with a lack of accurate and efficient ways to assess risk and accesss funding. We’re leveling the playing field so that SMEs can seize upon further opportunities for growth.”
Nick Chandi, PayPie CEO and Co-Founder

We invite you to try PayPie and we can’t wait to hear what you think

See more reviews and insights via FitSmallBusiness

In addition to our listing in the QuickBooks App Store, you can also learn more about PayPie in our listing within the 2018 Small Business Accounting Software Reviews & Pricing Guide.

QuickBooks, QuickBooks Online, QuickBooks Connect and the Small Business App Showdown are registered trademarks of Intuit Inc. 

The information in this article is not financial advice. It does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional. 

4 Financial Ratios for Cash Flow and Risk Assessment

financial ratios hero image

Financial ratios help small business owners who want a fuller picture of their company’s overall financial health.

Ratio analysis takes raw financial figures and helps you uncover patterns and problems at a glance by establishing relationships between variables and providing benchmark indicators.

Within PayPie’s cash flow forecast and analysis, there are four go-to financial ratios that indicate how efficiently a business is operating and managing its financial obligations.

1. Cash-inflow-to-cash-outflow ratio

The cash-inflow-to-cash-outflow ratio, also known as your operating cash flow, reflects your company’s short-term liquidity (the cash you have on hand, or can get your hands on quickly).

This is one of the financial ratios that measures the number of times your company can pay off its current debts with cash in a set period. A high cash inflow to outflow ratio suggests that your company brings in more cash than it needs to pay off its debts. A lower one signals that your cash flow is negative and that your business may have trouble paying its debts within a set amount of time.

Learn more about determining your break-even point.

Calculating cash inflow to cash outflow — an example

Patty’s Pastry Pagoda sells a variety of outstanding snacks. But working in the bakery biz doesn’t always mean your company’s dough is in order. Her pagoda has high fixed costs, such as gas and electricity bills. She also has to buy enough baking supplies to keep producing pain au chocolat without a hitch. Patty has to figure out how her cash inflow to cash outflow ratio looks if she wants to make sure she has the bread to pay off her debts.

Patty’s annual cash flow is $200,000 and has $190,000 in current liabilities. This gives her cash inflow to cash outflow a ratio of 1.05, which means she’s at risk of not having enough cash to keep up with payments.

Here’s how Patty calculated her operating cash flow ratio:

cash flow ÷ current liabilities = cash inflow to cash outflow ratio

$200,000 ÷ $190,000 = 1.05

2. Current ratio

The current ratio is similar in some respects to the cash inflow to cash outflow ratio. Both measure a company’s ability to pay off obligations, but the current ratio offers more details about how a business can handle short- and long-term obligations.

The current ratio takes accounts for a company’s current liquid and illiquid assets (hence the name) with regard to its current liabilities. This ratio is also known as the working capital ratio since it shows how much capital a company has in hand after costs are factored in.

Much like the cash inflow to cash outflow ratio, your current ratio signals your ability to pay off current debts. The higher the number, the better equipped you are to make these payments. A number below one signals that you can’t afford to pay off your existing debts with the amount of cash you have.

You can also use the quick ratio to get a similar impression of your immediate cash flow. The quick ratio is similar to the current ratio, except it removes the cost of inventory from the equation. This is helpful if you want to want to exclude inventory from your estimates—say, for example, if you do not want to factor in your ability to sell your supplies to help pay off debts.

Calculating a current ratio — an example

Patty’s business is on a roll, but she’s worried about having enough cash to keep things on the rise. She’s got a kitchen filled with all the tools she needs to bake her customers’ favorite snacks. But buying all of that equipment wasn’t cheap and she had to finance these purchases as a result. Now, Patty wants to make sure she can pay for all of the machinery she bought with credit.

Patty has $275,000 in current assets since she’s got $200,000 in cash and invested $75,000 of her own money into the business when it started. She also has $190,000 in liabilities due to her loans. This leaves her with a current ratio of 1.4, which is safe enough to keep her business running—so long as there aren’t any unforeseen financial emergencies.

Here’s how Patty calculated her current ratio:

Current assets ÷ liabilities = current ratio

$275,000 ÷ $190,000 = 1.4 

financial ratios pointing out

3. Debt-to-equity ratio

One of the financial ratios that measures solvency, the debt-to-equity (D/E) ratio (also known as your as risk, gearing or leverage ratio) shows your company’s assets versus the amount of debt it has taken on. It determines how much your company’s assets are worth relative to the amount of debt it has, which can help you understand your attractiveness to investors and lenders.

In essence, it shows you how much debt you use to run your business. D/E ratio also helps you stay on track with debt, since you can make sure you’re not taking too much on at once. Business lenders also use this ratio to gauge your attractiveness as a borrower, since too much debt may signal that your company isn’t making enough money to finance enough of its own operations.

A healthy debt-to-equity ratio keeps both numbers relatively low, and near one another in value. In other words, the lower the ratio the better. However, debt-to-equity ratios vary by industry and can be sensitive to interest rates.

Calculating a debt-to-equity ratio — an example

Patty wants to take out a loan to purchase a new pastry proofer. But first, she has to figure out how much debt her pagoda has relative to its equity, since this helps lenders determine if she’s able to prove her ability to pay them back. Patty has $250,000 in assets and $190,000 in liabilities.  This gives her a debt-to-equity ratio of 1:6, which means she has one dollar of debt for every six dollars of equity. That’s a pretty great position to be in, as it means that most of your company’s money hasn’t come from loans.

Here’s how Patty calculated her debt-to-equity ratio:

Total liabilities (debts) ÷ assets (equity) = debt-to-equity ratio 

$190,000 ÷ $250,000 = .76 

Just looking at the numbers before doing the math, you can see that Patty’s debts are creeping up on her assets (equity). She’s doing ok, but she might want to pay down some debt and be mindful of her ratio as she moves forward.

Learn more about accounts receivable turnover (another ratio) and why it matters. 

4. Operating profit margin

Your operating margin is among the most important, and useful, financial ratios to keep an eye on. It shows the percentage of profit your business generates from operations — prior to subtracting taxes and interest charges.

Your operating margin measures your company’s profitability. It demonstrates how much money is left over from every dollar of revenue you make, minus the cost of goods (COGS) and operating expenses. This figure helps you determine your company’s efficiency — a low percentage means that most of the money you make in sales goes right back into expenses, rather than your bank account.

Be sure that your operating profit margin calculations include the right kinds of expenses. You’ll want to use your operating profit within this formula, since it removes the cost of goods, labor, and other daily business expenses from your total earnings. You’ll also want to exclude certain expenses, such as interest and one-off expenses.

With an operating profit of $200,000 and a total revenue of $150,000, here’s how Patty calculated her operating profit margin.

operating profit ÷ total revenue = operating profit margin 

$200,000 ÷ $150,000 = 1.33 

This means that Patty earns roughly only 13¢ from her operations once you factor out other costs. This is a margin she’ll want to improve by adjusting pricing, cutting input costs and optimizing her operations.

Get insight into your business’s health

There’s no shortage of metrics out there to help you manage your company’s cash flow. The financial ratios discussed in this article will do the same for you, as long as you know what they mean.

But rather than spend the time calculating these financial ratios manually, simply connect your QuickBooks Online account with your PayPie account. PayPie’s analytics will then comb through your financial data to create an in-depth interactive dashboard containing these ratios and more.

Along with a breakdown of your cash flow metrics, you’ll also receive a proprietary risk score and assessment based on your current QuickBooks Online data.

main dashboard and ratios

Get started today and learn more about the factors affecting your cash flow and credit profile.

At the writing of this article, PayPie currently integrates with QuickBooks Online. Integrations with other platforms are in development.

The information in this article is not financial advice and does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional. 

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