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.

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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.

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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!

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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. 

4 Financial Ratios for Cash Flow and Risk Assessment

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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. 

Images via Pexels. 

Determining Your Break-Even Point

Finding Your Break-Even Point

Making a sale is exciting. Making lots of sales is even more exciting. Profit is crucial to business survival. No one goes into business to lose money, after all.

However, profit’s a deceptive metric for success that often only gives you part of the picture. For example, sales are recorded on a profit and loss statement, regardless of whether the customer has paid for them yet.

While profit is simply the difference between what it costs you to produce and sell a good or service and what you sell it for, your break-even point tells you how much money you need to make in order to cover your operating costs.

Thankfully it’s easy to determine your company’s break-even point. The first step is monitoring your cash flow using tools like PayPie. Armed with this information, you can determine just how close you are toward being cash flow positive and having the working capital you need to reinvest in growth.

But first, what is a break-even point?

Put simply, the break-even point (BEP) is a financial indicator that demonstrates when your company’s net profits match its expenses. “When” — in terms of the concept of timing or at what point your income is equal to your costs.

The thinking here is that if you when you get there, you’ll also know more about how you got there. More importantly, you’ll have a better idea of what to do to have your profits consistently surpass your expenses.

Your break-even point fluctuates with your costs, including start-up costs, fixed assets, and day-to-day purchases. The more you spend to do business, the higher your break-even point to stay in business. Therefore, most companies calculate their break-even point monthly or annually — or both. This helps you orient your business toward higher profits and lower expenses, as they’re the key determinants behind whether or not you’re “breaking even.”

Factors for determining your break-even point

Every company’s break-even point is different. If you’ve made major capital investments in your company, you’ll have to earn higher profits to overcome these costs. Or, if you have high raw materials and labor costs, you might have a long way to go before you hit your break-even point. Alternatively, if your business doesn’t require much of either, you’ll hit your break-even point as long as you’re generating enough revenue and charging the right prices for your services.

There are still a few core tenets behind a break-even point calculation, even though each figure is different. These key metrics influence how you determine your break-even point. Your best bet is to create a sales forecast before you dive into a break-even point forecast, as that will give you insights into each of the metrics below.

The difference between profitability and cash flow. 

Average per-unit cost

Your average per-unit cost is the amount of money it costs for you to make a single unit (product or service, depending on your business). You’ll typically want your per-unit cost to be as low as possible if you want to maximize your profit margin.

Average per-unit sales price

The average per-unit sales price — also known as per-unit revenue — is the money you receive for every unit you sell. In short, it’s the amount you charge on every sale (or invoice). This stat doesn’t account for taxes, labor, or raw materials costs. It’s just what you take in for every item you sell. Be sure to account for sales and discounts, as these will lower your per-unit sales price. And if you sell more than one item, you’ll have to calculate an average price across all products.

Fixed costs

Fixed costs are the expenses you regularly incur over a set period of time, like a month, quarter, etc. This includes raw materials, rent/mortgage, payroll, taxes, and any other expenditure that you can count on every month. Fixed costs, also known colloquially as overhead, or the cost of doing business, are recorded in your business’ income statement. You’ll want to make sure your fixed costs are low if you want to make it easier for you to hit your break-even point, since your overhead eats into your profits.

What your financial statements tell you. 

Determining your break-even point

When you determine your break-even point, you’re basically asking yourself whether you can sell enough units to cover the costs that go into producing them. In short form, your break-even point equals your fixed costs divided by the difference between your per-unit sales price and per-unit costs.

Break-Even Point An Example

Calculating a Break Even Point: An Example

Tara’s Teddy Bears is introducing a line of cute, cuddly mini bears. But what will it take to break even each month for this line alone?

Here’s how Tara worked out her average cost per unit. Based on an estimate from her manufacturer, it will cost $500,000 to produce 1 million tiny teddy bears. Running the formula, this means the average cost per unit is 50¢.

Average per-unit cost = total production costs ÷  number of units produced

$500,000 total production costs÷ 1,000,000 bears = 50¢ per bear

In this example, you’ll be able to see how pricing makes a difference in the ultimate break-even point.

  • If she charges $10 a bear, she’ll earn $10,000 in revenue for every 1,000 bears she sells.
  • If she charges $15 a bear, she’ll earn $15,000 in revenue for every 1,000 bears she sells.

To get to her break-even point for her new line of bears, Tara runs the numbers, based on $1,000 in monthly fixed costs using the formula below:

Break-even point = fixed costs÷ (per unit price – per unit cost)

  • $1,000 ÷ $9.50 = $105.26
    With this break-even point, Tara has to sell more than 10 bears at $10 each month in order to cover costs.
  • $1000 ÷ $14.50 = $68.97
    With this break-even point, Tara only needs to sell more than 4 bears a month at $15 each in order to cover costs.

As this isn’t her first product line and she knows that her other product lines all sell 100 units or more each month, she can see that she has the freedom to charge either $10 or $15. Of course, she’ll examine other market factors as well and look at her break-even point for her entire company as well.

Other considerations when using your break-even point as a KPI

From the example above, which features one product line, it’s easy to see how a lot of generalizations and assumptions are made to get to an overall average for every product a business produces. Thus, measuring a break-even point a key performance indicator (KPI) is easier for businesses with fewer product and services.

In its simplest calculation, a break-even point lumps all the fixed costs together. It simply shows you the numbers you need to hit. It doesn’t account for verifying market demand, which is part science and part leap of faith in the first place. Your break-even point is like anything else, it doesn’t exist in a vacuum.

The best thing you can do is understand how it was calculated, what it means and how to apply it. For instance, if Tara knows there’s the potential for teddy bear stuffing costs to increase, she might opt for charging $15 a bear to help hedge her bets. Or if she has a sale each year, she knows she has the margin to offer a sale price of $10.

Burn rate and runway — how long your cash will last. 

Your break-even point and cash flow

Because there are so many moving parts to a business, monitoring your cash flow and the factors that affect it gives you the perspective you need to make future projections and better-informed decisions.

Cash flow analysis that includes a cash flow statement and cash flow forecast helps you compare things like the timing of your income versus the timing of your expenses. It can show you if you’ve got more debt than equity and highlight a range of indicators, ratios and variables.

Hitting your break-even point is only one step toward being cash flow positive and staying that way. It’s simply one piece of the puzzle. However, a cash flow forecast and analysis from PayPie gives you a way to put all the pieces together — using your current financial information.main dashboard and ratios

If your business uses QuickBooks Online, you can get started today.

Simply create an account, connect your business and start seeing what your numbers have to say.

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. 

Images via Pexels. 

Fixing Business Credit Report Mistakes

Business Credit Report Mistakes Don't Add Up

As a kid, few consequences were more frightening than the threat of having something go on your permanent school record. Any slip-up, large or small, could go on this life-determining record. The prospect of a tainted record was all most of us needed to sit up straight, respect our teachers, and resist the temptation to shoot a spitball at the blackboard.

Your credit report is the adult equivalent to your school record. You even get graded for it. It also has real-life consequences. What happens if your business credit report comes back with mistakes? That’s like having an expulsion on your record that never happened.

Fixing business credit report mistakes isn’t simple,  but it’s not impossible either. Be prepared to make several calls, carefully go through your company’s financial records, and remain vigilant. As challenging as this may seem, it’s worth it in the end. Plus, you can keep an eye on your big picture financial metrics with PayPie.

Finding business credit report mistakes

Before a potential error on your business credit report makes you shake your fist at the sky in anger, check your books. Rule out any possibility that you may have left out important information in your own recordkeeping. Think of it as the “Have you tried turning it off and on again?” step.

You should also ensure that you know what your business credit report covers. Your credit score is a numerical value that distills your company’s record of paying vendors and creditors on time, the amount it debt it owes, the length of your credit history, and any new kinds of credit your business has (loans, lines of credit, credit cards, etc.). Credit reports from Dun & Bradstreet, Equifax, Experian, and TransUnion all provide you with a credit score for your company, as well as a rundown of your business’ credit history.

Request a report from each credit bureau

Business credit scores vary by bureau. Some even include slightly different information on their report than others. Equifax, Experian, and TransUnion all use a scale of 0-100, with 100 being the top possible score. Overall grade assessments will differ depending on the criteria used and how these factors are evaluated. This is why it’s a good idea to request reports from each agency if you suspect there might be a mistake.

Once you have credit reports from each agency, you’ll want to read through them all and see if the information they contain matches up with your business records. If you’re certain that your credit report has a mistake, there are plenty of reasons why that might have happened. Better yet, there are several steps you can take to fix it.

Improving your business credit score — where to start.

Business Credit Report Mistakes Not Right

Common business credit report mistakes

Some business credit report mistakes are more common than others. Most come down to human error. Here are some of the more common mistakes you might find on your credit report and how they got there in the first place.

1. Late payments from seven (or more) years ago

Your credit score should remove late payments if they’re seven years old or older. But this doesn’t always play out as it should. Sometimes, old late payments stay on credit reports long after they should. If this is the case, contact the credit bureau to contest the entry. They will either investigate the entry or simply strike it from your record if the claim is valid.

2. Credit accounts opened under a similar name

Credit bureaus aren’t perfect. Their data is often only as good as what gets reported to them, which means that clerical errors can cause credit report mistakes. If a company with a name similar to yours opens a credit account, there’s a possibility that their information might get mixed up with yours.

3. Closed accounts listed as open

Your creditors should note when you close your account or you finish paying your loan, but mistakes happen. Old credit cards or a closed business line of credit can show up on your current credit report due to clerical errors. This could accidentally signal to credit agencies that you have more credit accounts open than you actually do. In turn, it may suggest that your company is borrowing more than it should. Be sure to look for old credit accounts and loans on your report. Then check with your lenders to make sure they’re no longer open in their system.

4. Paid tax liens from seven (or more) years ago

Old tax liens on your credit report are similar to late payments. They no longer belong on your credit report if you paid them off and they’re seven or more years old. Most agencies will remove lien records once the seven-year mark hits. If you see an old lien on your credit report, reach out the credit bureau and request that they remove it.

5. Inaccurate credit limits or loan amounts

Credit agencies determine your score based in part on the maximum amount you’re approved to borrow (your credit limit), and the actual amount you’re currently borrowing (your loan amount). If this information is incorrect on your credit history, you may appear to be borrowing more money than you should — even if you’re approved for more than the report suggests. Make sure your credit limit information, loan totals, and remaining balance are all correct when you review your credit report.

6. Fraudulent activity linked to your business

Of all the potential sources of credit report mistakes, fraud is the most vexing. Credit fraud is all too common these days, with more than $3.7 trillion lost due to business fraud in 2017. It’s not always easy to keep track of daily cash flow, which can help prevent fraud before it happens.

The differences between business and personal credit.

Who to contact to fix business credit report mistakes

The process by which you fix business credit report mistakes varies depending on the kind of error in question.

When to reach out to vendors first

If your payment history with a vendor is inaccurate, contact the vendor before going to the credit bureau. Credit agencies rely on vendors for payment history information. So start by going to the source. Reach out your contact or someone within the accounts receivable department. This process also helps in clearing up confusion involving a similarly named company appearing on your business credit report.

When to reach out to creditors and lenders first

Give your creditors or lenders a call if your credit limit, payment history, or loan totals look incorrect. Odds are that they may not have updated your business’ profile. The same holds for any closed credit card accounts or loans that still appear to be open on your credit report. The creditors and lenders themselves are the first points of contact that can help clear up any issues regarding your use and repayment of credit. Again, it’s a matter of going directly to the source.

When to contact the credit bureaus first

There are a few reasons for reaching out to a reporting agency directly. The most common instance is when the other third parties can’t shed light on the mistake. You would likely reach out in cases where an old tax lien or delinquent payment still appears on your credit history after the seven-year mark expires. Or if you’ve solved the problem with the primary source, but your report itself is still incorrect.

When you have to fix an error on your credit report, the first thing to do is stay calm. Next, be patient. Fixing business credit report mistakes may take a while — and you may need to contact a few different companies to get things fixed.

Track your credit in near-real-time

Knowledge is power, particularly with regard to your company’s overall financial health. PayPie’s cash flow analysis helps you forecast future cash flow and track other key metrics like income vs expenses or where your greatest strengths, exposures, and opportunities lie.

Your business risk score, featured prominently in the report dashboard, is generated using a sophisticated algorithm along with the current data in your small business accounting software. This score (from 0 to 100) gives you a sense of how third parties, especially lenders, view the financial strength of your business.

main dashboard and ratios

PayPie is currently compatible with QuickBooks Online and more integrations are in the works.

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. 

Images via Pexels.

Business Credit vs Personal Credit: Why There’s a Difference

business credit, personal credit and trust

Most people recognize the importance of their personal credit score. It determines the credit cards you qualify for, if you can get a good rate on a personal loan, and whether you can get a mortgage. All too often, entrepreneurs may not realize that they also have a business credit score. This rating can be just as important to your business as your personal score is to your personal finances.

Protecting and maintaining a solid business credit score is essential to securing financing and setting up favorable terms with vendors. Whether you’re an old hat or new to the world of business ownership, knowing where you stand is the first step toward building solid business credit. (Get a quick estimate of where you stand with a risk assessment from PayPie.) 

What’s the difference between a business credit score and a personal credit score?

The concept of a credit score — be it a business credit score or a personal one — is to take one’s lending history and distill it into a singular metric. This number reflects how good you or your business is at paying back the money it borrows. Both business credit and personal credit reporting agencies develop their credit scores through proprietary algorithms and base their figures on set scales. In the end, both are measures of trust. (Imagine if you scored your friends and family members the same way.)  

Personal credit scores can go up to 850, although few (if any) people have one that high. An “excellent” credit score is 750 or above, which means you’re among the top contenders for a loan. A score between 700 and 749 denotes “good” credit, and means you’re likely to get approved for most (but not the premier) loans and credit cards. Once you’re between 650 and and 699, you’re in “fair” territory, and become less attractive to borrowers. Beyond fair territory is “poor” (600-649) and “bad” credit (below 600).

A similar setup determines your business credit score. Business credit reporting agencies look into whether your business pays its bills on time, uses only a moderate amount of its credit limit, and how long its been in operation. Business credit scores also take your industry into consideration, as business trends can impact your ability to pay back future debts.

Dun & Bradstreet, Equifax, Experian, and Transunion use their own algorithms to determine how creditworthy your company is, but grade with the same score range (0 to 100, with 100 being the best credit score possible). FICO’s Small Business Scoring Service, however, uses a 0-300 range for its scores. Each will look at many of the same factors to determine your company’s credit score, however.

What’s a Business Credit Report and Why You Should Care. 

business credit analysis

Why is business credit important?

Your business credit score does more than demonstrate how well you pay your bills. A good credit score can mean the difference between getting a loan with favorable terms, or even getting your application approved at all. Business credit scores provide lenders with a snapshot of how trustworthy your company is with its money, and if it’s risky to provide you with funding.

A good credit score inspires confidence in prospective lenders, business partners, and vendors. It demonstrates at a glance that your company’s 5 C’s of Credit are in good shape, that the industry it’s in is stable, and that your business has a good chance at remaining open for the next 12 to 24 months. You can put together a dazzling presentation to lenders and prove your business model, but your business credit score does the real talking.

It’s vital to consider your business credit from the moment you set up shop. Even if you don’t foresee the need for a loan, you’re going to want to start building a business credit history as soon as possible. If you do end up needing a loan, and want to prove that your company is worth the investment, you’ll be glad that you did. Plus, the sooner you build business credit, the sooner lenders can stop relying on your personal credit in order to make decisions about your company’s creditworthiness.

Read More on Improving Your Business Credit Score.

How personal credit can affect business credit

It’s essential to keep your business and personal finances separate. This isn’t just good for cash flow monitoring, it’s also crucial for your business credit as well. Lenders will look at your personal credit score if your business credit history isn’t available, or doesn’t provide a robust picture of its borrowing history. This is great if your personal credit is good or excellent — less so if you have a shaky credit history.

This may seem paradoxical, considering that most corporate entities protect individual owners from taking on their company’s legal and financial obligations. But matters of credit tend to function outside of this convention. Creditors can access your personal credit history and credit score in order to make business decisions. Most will do so as part of the application process, too. It’s particularly important to have a good personal credit history, then, if you want to borrow for your business. Even if you’ve got a great track record with your company’s credit, you may still get rejected for loans and credit cards if your own credit report comes back spotty.

Although lenders will consider your personal credit as part of most business loan applications, you can still put your best foot forward by building business credit early. This makes it easier for lenders to evaluate your business on its own merit, rather than relying more heavily on your own personal finances.

Read More on Separating Business and Personal Finances. 

How can I improve my business credit score?

There are ways to improve your business credit score — even if you’re just starting out. Here are four tactics to use to build business credit and raise your credit score:

1. Apply for a business credit card.
If you haven’t done so already, apply for a business credit card and use it monthly. More importantly, pay the balance off, in full, every month and stay well below your credit limit. The longer you do this, the more you demonstrate your company’s ability to handle money well and pay back debts. If you already have a business credit card and didn’t pay your full balance every month (or even missed a few months’ payments altogether), the same logic applies. Build a steady habit of paying your balance in full, and you’ll be on your way toward a better score.

2. Check for mistakes.
You should also make sure that your company’s credit history is accurate. Purchase a credit report from one or more reporting bureaus and review the information therein for any inaccuracies. If you happen to find an error in your report (nearly 25% of businesses do), be sure to contact the issuing bureau immediately. You’ll want to monitor your credit history regularly for any inconsistencies (or worse yet, fraudulent activity).

3. Negotiate trade credit.
Another great way to improve your credit score is to establish trade credit with recurring vendors. Trade credit means that a company trusts you to pay for goods and services per period, rather than conducting a transaction every time your order gets fulfilled. The more trade credits you establish with repeat clients or vendors, the more you can demonstrate that your company is trustworthy. You uphold your obligations to pay, and do so when scheduled. This is exactly what future lenders want to see.

4. Establish a line of credit.
Consider opening a business line of credit if you want to improve your credit score. A line of credit avails you to a set amount of money from which you can borrow, only paying interest on the funds you’ve taken out. Lines of credit demonstrate that you can consistently pay back your debts. Plus, they build trust with your existing lender, which may make them more inclined to approve future loans as well.

It’s important to take charge of your business credit score, whether you’re just starting your business or have been in operation for years. Credit is not simply a number that’s assigned to you — it’s a reflection of your own behaviors, patterns, and business operations.

Read More: The 5 C’s of Business Credit Explained. 

Business credit and asset-based lending

Earlier in this article when we talked about building business credit, we discussed traditional forms of business financing. However, you should also be aware of the growing range of alternative lending options, including invoice factoring.

Invoice factoring is a type of asset-based lending in which you sell an outstanding invoice to a factor (lender) who gives you a set percentage of the invoice. The factor then handles the collections process and forwards the remaining balance, minus interest and fees once the invoice is paid.

Within this process, your risk profile is considered when setting the rates. However, the invoice itself serves as the collateral. Note: As invoice factoring isn’t captured by the established credit bureaus, it won’t hurt your business credit score. And if you use invoice factoring to ensure that you make other creditor payments, it helps you build business credit.

Assessing cash flow, risk, and financial health

If you use small business accounting software, you’re off to a great start. With PayPie, you can take this data and import it into an interactive dashboard that helps you analyze and monitor your most important metrics from income and expenses to the customers that represent your greatest credit exposures.

main dashboard and ratios

Cash flow and credit drive your business. Get the keys to take charge with PayPie.

PayPie currently integrates with QuickBooks Online, with further integrations planned for the future.

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. 

Images via Pexels. 

Working Capital vs Cash Flow

Working capital vs cash flow main imageAt PayPie, we understand that small business owners are always looking for ways to keep track of their company’s financial health. But it’s not always easy to know the difference between key measurements (accounting terms) like working capital and cash flows.

Each of these variables provides a different glimpse into your company’s finances. Working capital offers a snapshot of your company’s present ability to pay its most immediate debts, while cash flow projects all income and expenses over a specific period of time. Think of it as a macro and micro level of detail. Cash flow gives you the big picture of your inflows and outflows. Working capital zeros in further by analyzing your cash flow to ensure that you can meet your payment responsibilities.

Despite some similarities between working capital and cash flow, each tells a different story. Cash flow forecasting gives you the insights and analysis to examine both. In this article, we’ll take a closer look at how working capital differs from cash flow.

Working capital definition

What is working capital?

Working capital is the amount of operating money your company has after your debts are accounted for. This number not only includes the total amount of cash you have in hand. It also factors in the value of your equipment, investments, and inventory. In terms of debts, working capital factors in things like accrued expenses, accounts payable, short-term debt, deferred revenue, and the amount of long-term debt you may owe. Working capital compares assets and liabilities for the short-term, usually up to 1 year (12 months) at a time.

Here’s another way to understand working capital: Say a large segment of your company’s clients are affected by a natural disaster, delaying payment on current purchases and postponing additional near-term orders. Your bank loan is also due in full at the end of the month. Your customers are all busy responding to Mother Nature’s wrath and won’t have their own businesses back online come back for a few months. But, if you have working capital, you can cover this unforeseen cash flow hiccup with the funds you have at hand.

Cash Flow Forecasting: What You Need to Know 

Current ratio (good ratio) and working capital

It’s easy to get a baseline understanding of your company’s working capital by way of its current ratio. The current ratio demonstrates your company’s ability to pay for its long- and short-term obligations by assessing its total assets versus its liabilities. You can calculate your current ratio by dividing current assets by current liabilities. A result of one or above is considered a “good” current ratio.

The calculation itself is simple, but it’s important to make sure you’re accounting for every asset and liability, as opposed to only a handful. Your assets are anything your company owns and could turn into cash within a year. Liabilities are every debt or expense that your business expects to pay within a year or a business cycle.

Calculating a current ratio: An example

For this example, Connor’s Contracting has $300,000 in current assets and $100,000 in liabilities.

Current ratio = current assets ÷ current liabilities

Current ratio = $300,000 ÷ $100,000

Current ratio = 3

As a ratio above 1 is desired, Connor’s Contracting’s current ratio of 3 shows that the company is in good standing and capable of repaying debts, even if it were to incur an unexpected dip in sales or unanticipated expense.

Quick ratio (acid test ratio) and working capital

The current ratio provides a looser method of determining your company’s working capital. The quick ratio, however, is a bit more conservative, as it measures your company’s short-term liquid assets against its current liabilities. The quick ratio does not include inventory in your calculations as it can be more challenging to turn existing inventory into cash on short notice.

This is where quick gets its name — this ratio is all about determining what your business owns that can be turned into cash quickly. (Think 90 days or less.) Most businesses have fewer assets that fit the bill in this case, which makes your quick ratio more stringent than its current ratio.

Calculating a quick ratio: An example

Back to Connor’s Contracting with $300,000 in current assets and $100,000 in liabilities. For this example, let’s say the business has $200,000 in inventory.

Quick Ratio = (Current assets – inventory) ÷ current liabilities

Quick Ratio = ($300,000 – $200,000) ÷ $100,000

Quick Ratio: 1

With inventory taken out of the equation, the picture for Connor’s Contracting looks a little different. When inventory isn’t counted as an asset, the business’s liquidly is less favorable than when inventory is included.

cash flow compared to working capital

How working capital is different from cash flow

The differences between working capital and cash flow come down to calculations. Working capital takes a broad picture of your company’s overall holdings and debts to determine its ability to meet its financial obligations. Cash flow looks only at your income and expenditures. Granted, several components play a role in determining both working capital and cash flow, but the main difference between these two figures is their scope.

Cash flow reflects the amount of money that your business generates within a set period. Your cash flow shows you how much you’re bringing in, and how much money is flowing out. Cash flow also shows you how much money you have in hand to reinvest in your company.

Working capital demonstrates your ability to pay off immediate liabilities. Your working capital can (and will usually) fluctuate over time, but it’s not the kind of metric that you’d use to make future projections of your company’s solvency. Think of working capital as a more “just in time” way to evaluate whether or not your company is cash positive.

Cash Flow Basics: Key Concepts and Terms 

When working capital affects cash flow

Working capital does more than reflect your company’s current ability to pay off debt and sustain operations. It also helps creditors understand how a would-be borrower takes in revenue, spends its money, and whether or not it is likely to remain solvent in case of an emergency or market downturn.

You’re less equipped to deal with difficult times if your company operates with negative working capital. You may still have positive cash flow on a long-term basis, but you may not able to sustain your business operations if your cash flow dips. There are instances in which a business might be doing fine despite having negative working capital — usually, if it’s just made major investments in its own growth — but these kinds of examples are definitely the exception to the norm. Usually, insufficient working capital means that your cash flow is going to need to be much more positive than it would be otherwise.

Lenders are interested in how your company’s working capital and cash flow affect one another, too. In fact, they’ll likely make a decision on your loan request based on what they see. Borrowing money increases your cash flow, but not in a way that improves your working capital. You’ll see a short-term bump in the cash you have in hand, but you’ll have to reflect the debt repayment in your working capital evaluations. This could make lenders more reluctant to finance your business.

Cash Flow Statement and Forecast: Why You Need Both

Putting all the pieces together

It’s just as important to understand your company’s working capital as it is to keep on top of its cash flow. A cash flow forecast from PayPie provides you with detailed, near-real-time information on your company’s financials — including your current and quick ratios— along with other insightful analysis and breakdowns of your income and expenses. Your risk score, featured within the analysis dashboard, gives you an indication of how positively or negatively prospective lenders might view your business’ financial health.

main dashboard and ratios

Getting your report is as simple as creating a PayPie account and connecting your QuickBooks Online account.

Not a QuickBooks Online user? No worries. We’re working on collaborations with other platforms, too.

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. 

Images via Pexels. 

Improving Your Business Credit Score: Where to Start

Improving your business credit score main image

Many businesses will need to borrow money at some point to fuel their growth. As part of this process, your business credit score determines whether or not you qualify for financing and the terms that are set. The higher your credit score, the more you’ll be able to borrow and at better rates.

Much like a personal credit score, your business credit score reflects your company’s repayment history with loans, credit cards, and other debts. Improving this score (building your business credit) goes beyond the basics of making timely repayments.

Other factors for maximizing your credit score include partnering with the right vendors, establishing trade lines with vendors, and keeping your information current with the established credit bureaus. You can also get a good indication of your business’ financial standing with the customized risk score generated by PayPie using a combination of current financial data and a sophisticated proprietary algorithm.

What is a business credit score?

Consider that 45% of businesses don’t know they have a business credit score and 82% don’t know how to interpret their credit reports, the answer to this question is relatively important.

It’s true. Your business has its own credit score. The amount of debt you owe largely determines your credit score. The frequency with which you pay it debts and how often you seek new sources of credit also influence your business credit score.

Other metrics that determine your business credit score include your outstanding balances, payment history with vendors and lenders, and the record of purchases you’ve made with vendors (also known as trade experiences). Credit reporting agencies will also examine your company size, risk factors in your industry, and the amount of credit you’ve used compared to the amount your lenders are willing to give you (also known as your credit utilization ratio).

Reporting bureaus take this information and assign your company with a business credit score. Unlike a personal credit score, which goes to 850, business credit scores have a lower maximum range. Depending on the bureau, your maximum score will generally either be 300 or 100, with a few exceptions.

What’s a Business Credit Report and Why Should You Care?

Where does the information for a business credit score come from?

Each credit agency may use a different algorithm to determine your score, and public information largely determines your business credit score (rather than private financial information from credit card issues and lenders for personal debts).

You’ll want to make sure that your business credit score is as high as possible, and that it contains accurate information about your use of credit and your payment history with vendors and creditors. These factors influence your score heavily, and any mistakes may prevent you from getting the credit score you deserve.

It’s also fairly common for businesses to find mistakes on businesses credit scores issued by established credit bureaus. In fact, nearly 25% of all businesses find a mistake that’s significant enough to lower their credit rating.

How to build or improve your business credit score

Your credit score is largely determined by public information, as we mentioned before. But that doesn’t mean that there aren’t several steps you can take in order to make your business credit look as strong as possible.

1. Apply for (and use) a business credit card

Building a credit history means — you guessed it — using credit. Creditors love to see that a business uses its credit wisely over a long period of time. The longer you can demonstrate a track record of proper credit card usage, the better.

If you haven’t already applied for a business credit card, do so as soon as you can. You may not have the highest credit limit or the snazziest card, but it’ll put you on the right path toward building your credit history. From there, you can go on to apply for cards with greater perks or higher credit limits once you’ve established yourself.

Read more about business credit cards: How to use them and how to find the best ones.

2. Establish trade credit with recurring vendors

Setting up trade credit with repeat customers (or vendors) is another great way to demonstrate your creditworthiness. Trade credit is basically the notion of performing services or getting goods from a company without demanding payment after every transaction. Whenever your vendor provides you with their business and does not request cash upfront or upon delivery, they’re extending you trade credit.

Trade credit goes a long way in regard to creditworthiness because it demonstrates that you’re dependable, and pay your debts accordingly. If your suppliers can trust that you’ll pay on time at the end of a predetermined period, other creditors will be more likely to trust you as well.

3. Apply for a line of credit

Another excellent way to build credit history is through a line of credit. A business line of credit is a set amount of money that a lender agrees to provide to your business. You can draw money from the line of credit when you need to use it, and pay interest only on the amount of money you’ve borrowed.

Lines of credit are great for building your credit history, as they show that lenders trust you to be diligent about repaying your debts on a recurring basis. You’ll build trust with your existing lender, and show other potential lenders that you’ve got a good history of fulfilling your obligations.

looking at the numbers in your business credit score

How to check your business credit score

The first step toward improving your credit score is making sure that reporting bureaus have the right information in the first place. Equifax, Experian, and Dun & Bradstreet all provide business credit reports — each with a different score based on their internal algorithm.

Dun & Bradstreet charges around $60 and provides you with a credit report, credit summary, and risk score. They also provide you with a PAYDEX score — a measurement of how quickly you pay your creditors — as well as a financial stress score that assess the overall financial health of your company. Even if you don’t opt to get a Dun & Bradstreet report, it’s a smart idea to register for a DUNs number, which puts you in the company’s database and sets up your credit file.

Equifax and Experian both offer credit reports, but neither of them are as robust as Dun & Bradstreet’s. For $99.99, Equifax will send you a report that includes your public records and a business failure score that gives you insight into how sustainable your company is. Experian charges $36.95 for its report, but only provides you with basic details about your company’s credit projections.

Your PayPie risk score is a focal point of the insights and analysis you receive when you connect your business. It gives you perspective on how prospective lenders and business partners might evaluate your current financial standing.

The 5 C’s of Credit Explained. 

4 ways to improve your business credit score

There are several ways you can improve your business credit score beyond opening credit accounts and being good about repaying debts on time. In fact, it’s important to go beyond these elementary tasks if you want to be proactive about guarding your business credit score against erroneous information, fraud, or unwarranted demerits in your credit history. If you’ve covered the basics of getting a solid business credit score already, here are some of the tactics to take in order to truly take charge of your company’s credit.

1. Monitor business credit score changes

Your business credit report isn’t always perfect. Just like with a personal credit report, it’s common to see errors that could unfairly damage your overall score. Monitor your business credit report often, and report any erroneous information as soon as you see it. This can help ensure that your company gets assessed fairly, and fix any potential mistakes quickly.

Common business credit report mistakes and how to fix them. 

2. Pay your bills on time (or before they’re due)

This one might sound obvious, but paying your bills promptly is the best thing you can do to keep your business credit score as high as possible. Many companies report payment histories to credit monitoring agencies. The faster you submit payments, the better you’ll look when they give their information over to these organizations.

3. Have a mix of credit

Using a business credit card is great for your credit score. But having a line of credit, installment loan, and a business credit card can be even better. This demonstrates that your business can maintain several kinds of credit at once. The more diverse your credit lines are, the more you demonstrate your ability to pay off what you owe under different circumstances. You’ll have to use each of these credit options wisely, however, or you can end up doing more harm than good.

4. Sustain a good credit utilization ratio

Merely opening a business credit card account isn’t enough to show that you’re creditworthy. You need to actively use the card (or your line of credit, if that’s your preference) in order to give credit monitoring companies a glimpse into your trustworthiness. The more you use your credit card — and pay your bill on time — the more these agencies can trust that you’re a good candidate for loans. Aim to use only 25% of the total amount of credit provided to your company, however. Carrying a high balance can make you look like a riskier bet, as it signals that your business might not have the cash to pay for goods through other means.

How Cash Flow Forecasting Maximizes Business Funding. 

Keep an eye on the big picture

When you connect your accounting software to PayPie, you get the tools you need to monitor the key facets of business financial health. Our dashboard gives you the charts and graphs you need to see how your income compares your expenses or how your overall inflows compare to your outflows.

main dashboard and ratios

You get a deep dive into accounts receivables, including the invoices that have been outstanding the longest and the customers that represent the greatest level of exposure. The cash flow forecast helps you project how your inflows and outflows will perform in future and the risk score is a capstone metric that you can use to evaluate your current financial position.

Your credit rating and risk profile aren’t formed in a vacuum. They’re the sum of many moving parts and the more you know the more you can plan and respond accordingly. Managing risk and cash flow shouldn’t be intimidating. With the right tools, financial management is empowering.

Get started today and give your business the tools to build success.

PayPie is currently compatible with QuickBooks Online and more integrations are in the works.

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

Image via Pexels.

The Best Cash Flow Books for Business Owners

best cash flow books

Did you know that the average CEO reads a book a week? That’s 52 books a year. If you want to know more about cash flow, put some or all of these titles on your reading list.

The following books focus on the basics of cash flow monitoring, as well as some of the more esoteric concepts behind your company’s day-to-day finances. Our list of the best cash flow books runs the gamut — from barebones introductions all the way up to tips on tackling your company’s more confounding financial data.

But, even the best cash flow books can only go so far. In addition to your learnings, you’ll still need to apply your newly acquired acumen in the real world. PayPie’s cash flow forecasting tool helps you turn your financial data into meaningful cash flow metrics. (Another fact: SMEs who monitor cash flow on a monthly basis have an 80% survival rate.)

What’s covered in the best cash flow books

Let’s review a few cash flow basics before you load up your cart (virtual or real-life, depending on your preference). In short, cash flow is the sums of money that flow in and out of your business. Cash flow is a key indicator of an enterprise’s financial health. It also demonstrates, in real terms, whether or not your business is financially stable, able to pay its bills and can keep daily operations humming without major disruptions.

You’ll want your company to stay cash flow positive, with only a few exceptions. You’re cash flow positive if you have enough money to pay for your financial obligations without running out of money. If your business can’t pay off its debts, it is considered to be cash flow negative.

One of the only times you can expect to be cash flow negative (and not be in a potentially risky situation) is if you’re in the middle of a launch or an investment phase. This is usually the case for early-stage companies or those that are pre-revenue. (You would normally be prepared for a down period in either scenario.)

Like lists as much as you love books?
See our list of cash flow statistics,  cash flow sayings and 10 best businesses for cash flow.

The best cash flow books for novices

Every entrepreneur has to begin somewhere. Just because you’re not a financial whiz doesn’t mean that you can’t become one — or, the very least, learn enough about cash flow to keep your business humming. There’s a slew of books that are ideal for small business owners who are just learning the ropes of accounting and finance. These introductory cash flow books will give you a solid foundation by teaching you the basics.

cash flow for dummiesCash Flow for Dummies by John A Tracy and Tage Tracy

Cash Flow for Dummies offers exactly what you might expect from the title — a straightforward primer on the basics of cash flow. This book dives into the ins and outs of maximizing your company’s cash flow, cash management, and how these elements of your business affect its overall earnings. The authors spell out how to read cash flow statements as well as the best ways to analyze and monitor cash balances. It also covers other essential aspects of managing cash flow, including control methods for cash receipts, disbursements, and bank account reconciliation. And to round things out, the authors also show readers how to prevent fraud and waste, which can drain cash flow unexpectedly.

We recommend Cash Flow for Dummies for any newcomer to basic cash flow principles. This book not only teaches you the core components of any SME’s cash flow setup, but it also dives into the strategies and tactics that will help you make the most of your cash flow while avoiding potential pitfalls along the way.

Understanding Cash Flow by Franklin J. Plewa Jr. and George T. Friedlob

Plewa and Friedlob’s Understanding Cash Flow offers a succinct, approachable overview of how cash flow works, and what it means for your business. Although it’s a bit older than some of the other titles in this list, it’s one of the most meaningful books for cash flow novices.

This is due in part to the authors working under the assumption that you’ve likely heard the term “cash flow” in the past, but are probably unsure of what it truly means (and might even be too scared to look). Understanding Cash Flow provides a detailed overview of how cash flow management affects company earnings. It also discusses how to analyze cash balances and cash flow statements and how to prevent fraud.

This book covers the basics of cash flow for any nascent small business owner who wants to take control of this element of his or her business. The authors discuss topics in detail without getting overly technical, which makes the complex subject matter a little easier to swallow.

Accounting for the NumberphobicAccounting for the Numberphobic: A Survival Guide for Small Business Owners by Dawn Fotopulos

Fotopulos’ Accounting for the Numberphobic builds on the core concepts explained in Cash Flow for Dummies, providing an easy-to-read primer on everything you need to know about your company’s finances. This book provides explains why it’s important to take ownership of your company’s accounting and finance practices, as well as how. Each chapter provides real-world expertise on topics like net income statements, measuring and increasing cash flow, and how to identify the break-even point — which is when your business becomes self-sustaining.

Accounting for the Numberphobic is a great read for any business owner who loves building their business, but hates looking at numbers. The book breaks down the intimidating factors of financial management and helps you understand why and how your numbers require steadfast attention.

Small Business Cash FlowSmall Business Cash Flow: Strategies for Making Your Business a Financial Success by Denise O’Berry

The premise behind Small Business Cash Flow is that most entrepreneurs know that cash flow is an important part of their business’ financials, but may not know what it means or how it works. O’Berry covers the basics of cash flow management down to the very basics of choosing the right accountant, all the way up to budgeting and record-keeping. The book provides a great primer on small business financing, as well as the top-level issues concerning cash flow management.

This book is for you if you’ve ever had a question about your company’s finances that you were too afraid to ask. There’s no issue too big or too small within Small Business Cash Flow, as even the basic purpose of money within your business is given its own chapter. This resource is perfect for the budding entrepreneur — or even the financially inexperienced veteran.

More Reading: Cash Flow Basics — Key Concepts and Terms

Cash flow books that go beyond the basics

There are tons of great books out there for entrepreneurs who know about cash flow basics but may want to dig a little deeper into the best ways to manage their company’s financial future. Or, alternatively, fix existing cash flow problems that might plague their business.

Whether you’re sleuthing out a cash flow issue, or simply want to extend your financial know-how, here are a few books that can help. These titles will help you build on what you know through tangible facts, solutions, and tactics to increase cash flow.

Cash flow problem solverCash Flow Problem Solver: Common Problems and Practical Solutions by Bryan E. Milling

Cash Flow Problem Solver is designed to help business owners determine where their company’s cash flow issues stem from, and how they can solve these problems before it’s too late. This book focuses on the basic principles behind positive cash flow management, which incorporate a proactive approach to cash flow principles and a vigilant focus on keeping a company’s operations cash flow positive at all times. Milling offers valuable insights that business owners can refer to on a daily basis, or when cash flow issues arise.

This title offers more than a detailed examination of what cash flow means, and why it’s important for your business. Cash Flow Problem Solver goes tackles common cash flow issues directly, providing tangible insights into the most routine issues that might impact your company’s bottom line.

Cash is still kingCash is Still King by Keith Checkley

One of the most popular sayings about cash flow is “Cash is king.” Cash is Still King makes a compelling argument as to why. The author compiles nearly 10 years of cash flow training experience with leading business firms and provides his firsthand experience with the common cash-related issues that companies tackle. Checkley’s book is rife with case studies in how companies managed to turn around their cash flow issues, and why their methods succeeded.

Cash is Still King offers readers with real-world examples of when and how companies end up with cash flow crises. Better still, the book provides realistic solutions that SMEs can use to create their own rebound stories.

Finance for non financial mangersFinance for Nonfinancial Managers by Gene Siciliano

Finance for Nonfinancial Managers covers the basics of financial reports, cost accounting, as well as operational planning and budgeting through plain-spoken language for those of us who aren’t inherent financial mavens.

Siciliano provides the info you need to better understand balance sheets, cash flow statements, and income statements without getting overly complex. Additionally, this book covers the basics of cost accounting, which can help you determine which products and services help provide your company with the most money. This title also helps you draft operational plans and budgets, synthesizing the financial tools you’ve learned in order to help you make more informed business decisions.

Finance for Nonfinancial Managers empowers you with the essentials of business financials, without getting mired in complex topics and complicated language. You’ll learn how to keep tabs on your company’s money and financial health, even if that only means that conversations with your accountant become easier.

More Reading: How Cash Flow Consulting Helps Businesses

The best cash flow books for financial gurus

Entrepreneurial financeEntrepreneurial Finance: Finance and Business Strategies for the Serious Entrepreneur by Steven Rogers and Roza E. Makonnen

If you’ve covered cash flow and triumphed over balance sheets, you might be ready to take on even bigger-picture topics and strategies. Entrepreneurial Finance offers tangible advice from top-tier business minds that can help you scale your business.

It provides effective methods for keeping solid fiscal control over expenses, along with tips on how to avoid the financial pitfalls. It also goes into valuing your company, raising debt and equity capital, and the best strategies for financing your growth.

Creative cash flow reportingCreative Cash Flow Reporting: Uncovering Sustainable Financial Performance by Charles W. Mulford and Eugene E. Comiskey

Creative Cash Flow Reporting isn’t a euphemism for fiddling with the books (which we would always advise against strongly). Rather, this book is about sniffing out the tricks and techniques commonly used to fudge financial numbers, or innocent errors that might result in you underreporting how much cash your company has in its coffers. Comiskey outlines methods for detecting cash flow issues — whether real or doctored — as well as methods for adjusting cash flow statements to yield better analysis of how your company earns and spends.

This book is a must-read for any entrepreneur with an advanced cash flow knowledge and a good handle on their business’ basic finances. Creative Cash Flow Reporting can help you take additional steps toward improving your financial records, and even help you better understand your company’s operating finances.

Understanding Balance SheetsUnderstanding Balance Sheets by George T. Friedlob and Franklin J. Plewa Jr.

Understanding Balance Sheets is the second book by Friedlob and Plewa on our list. This title builds on Understanding Cash Flow by drilling deeper into the basics of balance sheets and why they’re vital for understanding your company’s financial health. The authors dive into the major aspects of balance sheets and help business owners develop their own balance sheets. Better still, they provide an understanding of how constituent parts of a balance sheet — receivables, cash, inventory, long-lived assets, long-term debt, and equity — impact your company’s financial forecast.

If you’re interested in taking your financial knowledge to a new level, Understanding Balance Sheets is a great place to start. This book deepens your knowledge of company finances beyond cash flow, empowering smarter financial decisions down the road.

More Reading: 5 Stories Your Financial Statements Tell 

The plot thickens…

To really master your company’s financials, you’ll need to create a cash flow forecast using PayPie’s insights and analysis.

Another key metric included in this forecast dashboard is a proprietary risk score that shows you how your business is seen in the eyes of prospective lenders and business partners.

main dashboard and ratios

Signup is a breeze — simply create a PayPie account, connect your QuickBooks Online account, select your business and run your report.

PayPie currently integrates with QuickBooks Online, with further integrations planned for the future. 

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. 

Stock photo via Pixels. Cash flow book thumbnails via Amazon.