Free Cash Flow: A Deeper Look

Free cash flow change jar

At PayPie, we often talk about how cash flow is the best indicator of your business’s financial health. (And we truly mean often.) But there’s a metric within the bigger umbrella of cash flow that drills down on your survival odds as a company: Free cash flow.

Free cash flow lets your business really see what kind of cash your company has available to work with after it pays for operations and capital expenditures. It’s a bit less straightforward number than just looking at an income statement. But, if you do the legwork, like running regular cash flow forecasts using our insights and analysis, you’ll have an invaluable perspective on whether your business has the runway to invest — and the potential to grow.

Free cash flow defined

Most simply, free cash flow is the remaining portion of your business’s cash flow that you can safely access after the necessary expenses are paid for. Most often, it’s mentioned into context what you can “distribute.” But as a small business owner, you don’t need shareholders for that to be relevant.

Distributions include payouts to equity holders (including yourself as the proprietor of a business), but also those who hold debt (like any business lenders or other debtors), and any investors if that’s relevant for you, too.

Importantly, free cash flow is a short-term metric.

How to calculate free cash flow

Grab your most recent cash flow statement. There are a few different ways to calculate free cash flow, but the most straightforward among them is: 

Net Operating Cash Flow – Capital Expenditure = Free Cash Flow

Wherein operating cash flow (OCF) means:

  • Cash you make from business as usual, minus your long-term investments and taxes.
  • OCF takes into account depreciation expense by adding it back in.
  • You can find your OCF number on your cash flow statement.

Wherein capital expenditures (Capex) means:

  • Cash you’ve spent on capitalized fixed assets, including expanding, upgrading, or maintaining your systems, equipment, space, etc. for business
  • Capex takes into account depreciation expense by adding it back in
  • You can find your Capex number on your cash flow statement in the “investing activities” line

Read More: An Overview of Cash Flow Basics 

analyzing cash flow and free cash flow

How free cash flow differs from net income

If this sounds a bit like your net income, you’re not off base — but free cash flow has an important difference. Your net income takes into account depreciation. (The free cash flow formula adds depreciation back in, as you can see reflected above.)

For instance, say you make a big purchase on a commercial oven for your organic granola company. But you have to pay for it all up front. Although your net income, which you pull from your income statement, will give you one number that factors in depreciation, your free cash flow will indicate a different total. Since your free cash flow gives you a snapshot of the short term, you’ll see a more constrained cash flow number because you paid in a lump sum.

Depreciation is set up within the mechanisms of accounting by design to lessen the blow of a big asset purchase. (The IRS’s term for this deduction is “cost recovery.”) On the other hand, free cash flow’s this-very-second approach to your spending makes sure your costs are recorded as they happen — that’s why depreciation is handled differently. In short, with cash flow, you want to see how that big expenditure affects your bottom line ASAP.

More Tips: The Difference Between Cash Flow and Profit 

What your company’s free cash flow can tell you

Free cash flow is meant to be a short-term metric — and it is. You can learn a lot about your financial solvency as a company, both the now and future, if you contextualize your numbers correctly.

Free cash flow in the short term

Calculated once, your free cash flow gives you a pretty solid sense of your business’s true liquidity or ability to meet its current and near-term financial obligations. And that’s important. If you’re planning to distribute earnings or wages (including to yourself — an entrepreneur can only eat so much ramen). You also need to be able to do so knowing that it won’t happen at the cost of keeping the lights on.

Plus, if you have outstanding business loans — or even business credit card bills — understanding what you’re able to siphon off your cash reserves is essential. Especially if you have something like a business line of credit, wherein you have, say, a six-month window to pay back what you borrowed. Knowing you have the cash to pay back your lender now means you don’t have to worry about extra fees, penalties, or interest.

Free cash flow in the long term

As with most financial metrics — and data in general — the more free cash flow calculations you have, the better. If you see an upward trend in your company’s free cash flow, it’s a strong hint toward growth. It also gives you the opportunity to invest and reinvest in your company.

Since no one number tells a complete story, you’d have to dig into P&Ls and balance sheets to figure out what’s going right. Maybe you’re doing a good job at keeping your costs low as you’re able to increase your prices relative to market competitors. Maybe you’re expanding your customer base and lowering your customer acquisition cost (CAC) in the process. Whatever you’re doing, consistently increasing free cash flow generally indicates positive financial health.

On the other hand, a downward trend in free cash flow over a longer period of time will be able to raise your red flag. Why are you experiencing an earnings decline? Are you managing your assets efficiently and investing the right way? (And do you need help turning things around?)

Read More: The Stories Your Financial Statements Tell 

Why free cash flow matters

If we asked you, How’s your business doing? You’d have one answer to the question. If we asked an outside evaluator to come in, thumb through your exact same financial statements, and respond to the prompt, they’d very likely have something different to say. It has nothing to do with you. Rather, there are lots of ways you can read and interpret the stories your financial statements tell.

Cash flow is already among the least gray financial metrics to interpret. Your cash position paints a straightforward picture — either you’re cash flow positive or cash flow negative. (And the more work you do creating cash flow forecasts with insights from PayPie, the quicker you can make adjustments so the latter never happens.)

But even within cash flow, there’s something called a cash “smoothing” effect which can change the accuracy of your cash reporting. Some businesses use accrual basis accounting (versus cash basis), which reports and records both revenues and expenses as they happen, not when they’re received or incurred. That can sometimes cause a less accurate representation of their short-term cash. This is that smoothing, which essentially spreads (aka smooths) this cash data out over a longer period of time.

The numbers your accounting data provides is still entirely accurate in terms of net income — don’t worry. But free cash flow takes into account that smoothing and attempts to mitigate it. As a result, it’s harder to manipulate.

Hence, free cash flow is an even more precise way to get a sense of a business’s available cash. (It’s even a favorite metric for investors evaluating Wall Street securities, so you’ll be in good company using it.)

Gathering as much cash flow data as possible

If you research more about free cash flow, you’ll find there are quite a few more ways to calculate it and apply it to corporate finance. We’ll advise you not to worry about the others as a small business owner. (They’re a bit more in the weeds, geared toward huge public companies with lots of shareholders.) Just the general overview of free cash flow will be enough for you to understand more about your business’s assets at a deeper level.

That said, we did say more data is better, right? And we stand by it. Because there are many cash flow insights that are immensely helpful for you to make better data-based decisions every day as a business owner.

PayPie’s cash flow forecasting tools provide the deep, nearly up-to-the-minute numbers to help you make the best calls for your company by pulling your latest financial information directly from your accounting software.

cash flow management main dashboard

Signing up is easy, and QuickBooks Online users can connect easily connect their businesses. (Not a QBO user? More integrations are on the way, too.)

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

Images via Pexels. 

Cash Flow Budget: Why it Matters for Good Business

Cash Flow Budget Main Image

In the words of Ralph Waldo Emerson, “Money often costs too much.” At PayPie, we heartily agree: Cash flow is the best indicator of your business’s financial health and if you don’t watch it carefully, the price can be steep.

Having as many insights as possible about how cash is going into and out of your business is crucial to understanding both the short- and long-term odds of survival. Putting together a cash flow budget it part of that.

A cash flow budget — or cash budget, for short — is different than a cash flow statement. It’s luckily simpler to put together, but just as necessary to understand your runway.

A cash flow budget explained

At its simplest, a cash budget lets a business understand whether or not it has enough net working capital to operate during a fixed window of time. Because you’re assessing liquidity for operational solvency, businesses generally perform cash flow budgeting every month. (Quarterly can work, too, though PayPie recommends sticking with monthly assessments to get the best data you can.)

To calculate your cash flow budget, you’ll look at your estimated cash inflows and outflows over the period of your choosing. That’ll include what you forecast you’ll spend on products or services and operating expenses, plus what you expect to make (and actually get paid out).

If your sources of cash exceed your uses, you’ll have a positive cash position. Vice versa, you’ll be in a negative cash position. You’ll also be able to see your estimated cash position at the beginning of your next cash flow budget period (depending on how often you keep them).

cash flow budget piggy bank

Cash flow budget ≠ cash flow statement

A cash flow budget might sound similar to a cash flow statement, but it’s definitely not. That’s an entirely separate document.

Your cash flow statement is an essential accounting document that you’ll need to keep alongside your cash budget. Part of the trifecta of most important financial statements, your cash flow statement — or statement of cash flows — is a more complex, formal document. It also pulls from your other financial statements, so if there’s a substantial change to your income statement, it’ll affect your cash flow statement as well.

As cash flow is the lifeblood of your business, you need to keep your cash flow statement as current as possible. A best practice is to update it each month before running your cash flow forecast. This way you can ensure that the data in your forecast is up to date.

More Tips: How to Read a Cash Flow Statement

Where your cash flow budget fits into the big picture

Your cash budget gives you a sense of your short-term operations. Your cash flow statement, on the other hand, is taking a look at your cash solvency over a longer duration. You can think of your cash budget as a management tool where you’re watching your costs, supplementing the overarching formal statement of cash flows.

Only together will your company have the insights it needs to make the right decisions about your cash flow and the future of your business.

Read More: A Real-World Cash Flow Story 

Do you need to make adjustments to your overall budgets?

That’s what cash flow budgeting can tell you when used in tandem with your cash flow statement. (Plus, adding cash flow forecasting to the mix gives you just one more piece of the picture, helping you track patterns in your data, like whether your accounts receivable is out of sync with your accounts payable, for instance.)

Practical ways to use a cash flow budget

Let’s say you run a company that manufactures and sells contemporary rugs. You’d use your cash flow documents — statement, budget, and forecast — to keep track of your operations.

  • You cash flow statement will serve as your foundation to show how many synthetic rugs you’ve sold, how much it cost you to make them, and during which period of time this cash came in or went out.
  • Your cash flow forecast will be your resource to evaluate and determine your cash trends, like when your margins are synthetic rugs are highest.
  • Your cash flow budget will help you manage short-term costs, especially within operations.

These documents will all inform each other. For instance, if you understand your margins from your cash flow forecast, you’ll get insight into the things that affect your cost of goods within your cash budget. Using them together, you’ll be able to optimize your cash flow.

How to create a cash budget

In order to put together a thorough cash flow budget, you’ll need to gather information on your projected inflows and outflows. Most simply, you’ll need a topline on your receivables and expenditures to calculate your net cash flow.

Here’s a basic cash flow budget template to get you started:

Part I: Cash outflows

  • Operational
    • Supplies
    • Marketing and sales
    • Taxes
    • Payroll
    • Rent or property payments
    • Misc fixed expenses
    • Accounts payable
  • Investment
    • Asset purchases
  • Financing
    • Loan payments
    • Other short-term or installment payments
  • Misc expenditures

Part II: Cash Inflows

  • Beginning cash balance
    • Accounts receivable
  • Business revenues 
    • Asset sales
  • Misc income
    • Claims
    • Rebates
    • Shareholder equity (FYI: this only applies if you’re incorporated with shareholders)

Part I —Part II = Net Cash Flow

Note that this is only an example. Due to the nature of your business, you might be adding many more — or fewer — line items. But the point here is to show the kind of elements that comprise your cash inflows and outflows. This number will also give you a starting point for your next month.

What’s also important to note is how net terms (also known as trade credit) can have a significant impact on your cash flow budgeting. Since your cash budget is measuring the short-term, and you might be either extending or paying on net terms of 30, 60, 90, or even 120 days, your cash flow can be significantly affected when these invoices are either paid or due, respectively. Especially if they’re broken up into deposits and collection on delivery (COD).

That’s one of the reasons keeping a monthly cash flow forecast, along with a longer-view cash flow statement, is necessary.

More Tips: Common Invoice Payment Terms 

How your business can use a cash flow budget

A cash flow budget is yet another financial document. So, if you have your stuff together, you don’t need to do it, right? Well, if you 100% want to stay in business, we’d really, really strongly advise that you do.

More seriously, though, without detailed insights about your cash flow management, you won’t be able to know what changes to make to your cost centers in order to keep the doors open. The more data you have about your financial position, the better. And that’s what a cash flow budget provides you.

Make the right adjustments

For instance, say you go along with PayPie’s advice to do your cash flow forecasting for the month. (Good idea.)

Perhaps, after running the numbers, you end up with a projecting a negative cash position. That’s not great news, no. But it does empower you to do what you need to do to obtain the capital you need. Maybe that’s free up capital tied up in trade credit with invoice factoring or apply for a business line of credit.

Short-term cash flow budgeting also allows you to understand your cost centers more intimately. As a business owners working to better manage your net cash flow, you’ll be able to focus in on where you’re spending monthly and why. Is your cost of goods sold (COGS) rising faster than expected because of market conditions, or something else? Do you maybe have a larger buffer than your expected to be able to bring on extra help?

Read More: How Cash Flow Consulting Helps Businesses 

Short-term cash projections help with a long-term strategy

Smart entrepreneurs will also create cash flow budgets for several months in advance using projections for future cash flow. This’ll let you be prepared for any future issues — and spot cash flow gaps. The sooner you can see where your business might come up short, the faster you can act to mitigate issues so they never arise.

In order to have the most detailed data you can to create highly detailed cash budgets, you’ll need cash flow forecasting tools available. PayPie provides the insights entrepreneurs need to prepare themselves for every cash flow scenario, and take out the guesswork involved in making ends meet.

cash flow management main dashboard

Signing up for PayPie is easy. Just create your free account, connect your business and run your forecast. 

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.

Images via Pexels. 

Small Business Cash Flow Statistics: The List to End All Lists

small business cash flow statistics

Cash is king. Cash flow is one of the top small business killers. Money makes the world go round. You’ve heard it all. But what are the current cash flow statistics and trends to back this up?

At PayPie, we know how much foresight matters to your cash flow and overall financial health. Having the right facts at hand makes you better informed and prepared, regardless of the situation. For all the fact hounds out there, here’s our end-all-be-all list of small business cash flow statistics and trends:

There are more small businesses than any other kind of business

When you look at the numbers, it’s not just size, it’s quantity. Most businesses — anywhere in the world — are small to medium-sized enterprises (SMEs).

  • SMEs represent 99.9% of all US businesses.
  • 97.9% of all Canadian businesses are SMEs.
  • SMEs also represent 99% of all businesses worldwide.

Small business cash flow statistics and facts

If your SME struggles with cash flow, you’re not alone. Cash flow is a major concern. But it doesn’t have to be the enemy. This is why we’re committed to providing the knowledge and solutions you need to take control.

  • SMEs live and die by their operational cash flow.
  • Small businesses of all sizes consider cash flow one of their top 5 challenges.
  • Among failed SMEs, 60% cited cash flow as a cause.
  • For every $1 lent to small businesses, sales of these borrowers increased by $2.31.
  • 10 of the best businesses for cash flow include franchises, finance and insurance, health care and social assistance, home-based businesses, niche restaurants, real estate rental and leasing, retainer-based professional businesses, regulated industries, software as a service (SaaS) and service-based industries.

Read More: How to Read a Cash Flow Statement

Benchmark reports on small business cash flow

Because cash flow is so crucial to SMEs, it’s the subject of industry research and studies. The following are some of the most recent reports containing small business cash flow statistics. Thank you to all the organizations who put these together. Research is hard work and it’s even more difficult to do it well.

2017 C2F0 Working Capital Outlook Survey
(This SCORE article also summarizes the survey.)

Three-quarters of SMEs need more cash:

  • 37% of U.S. SMEs said their need for liquidity increased significantly.
  • 34% said it increased slightly.

How SMEs would use additional cash flow:

  • 33% would purchase more inventory or equipment.
  • 28% would expand operations, such as exporting to new markets or opening new locations.
  • 16% would use it to meet current obligations.
  • 10% would invest in employees through hiring, wages and benefits.
  • 9% would put the funds into R&D.
  • 4% would create contingency plans to deal with unexpected events.

SMEs and access to funding:

  • A majority said that access to traditional and alternative funding was easier.
  • There was a 40% increase in the number of SMEs using business financing.
  • 30% of SMEs feel that high interest rates keep them from using various forms of financing.
  • Alternative sources of funding, like invoice factoring and other online options, will be critical to meeting the needs of SMEs.
    • Globally, there’s an unmet credit need of $2.1 – 2.5 trillion.
    • By 2020, alternative lenders will have a 20.7% of the US small business lending market.

2016 JPMorgan Chase Report
(Based on info from 600,000 SMEs.)

  • Most SMEs only have enough cash flow to cover 27 days of expenses.
  • The top quarter of SMEs only has two months of reserves.
  • As a median, SMEs have $374 in average daily cash outflows and $381 average daily cash inflows of $381.
    • While this varies by industry, the median shows only a $7 difference between inflows and outflows. (This is detailed further in the SCORE infographic included in this post.)
  • The average daily cash balance is $12,100.
  • Labor-intensive or low-wage industries have fewer cash buffer days than capital-intensive or high-wage industries.

2016 SCORE Infographic — Small Business, Credit, Capital and Cash Flow (References the JPMorgan Chase report, specifically the daily income averages.)

Cash flow, costs, the availability of credit and building revenue are all top challenges for SMEs.

It’s harder for SMEs to get approval for business financing:

  • 38% of businesses with revenue less than $5 million are approved for bank loans.
  • 70% of businesses with revenue between $5 and 100 million and are approved for bank loans.

Why SMEs are turned down for business funding:

  • 25% are due to poor earnings and cash flow.
  • 21% are due to the size of the business.
  • 19% are due to insufficient operating history (new businesses).
  • 18% are due to poor credit.

SMEs are better at credit management than larger firms:

  • On average, SMEs credit scores are 48 points higher.
  • SMEs are less likely to have revolving bank cards that are 90 days past due.

Smaller banks approve more loans for SMEs

  • 60% of businesses with revenue less than $100K are approved by small banks
  • 69% of businesses with revenue between $100K to $1M are approved by small banks
  • 88% of businesses with revenue between $1M and $10M are approved by small banks.
  • 96% of businesses with revenue greater than $10M are approved by small banks.

The All-Too-Frequently-Cited U.S. Bank Study

Seen this one? 82% of all businesses fail due to poor cash flow management or poor understanding of cash flow itself. At PayPie, we’re careful to reference this statistic because:

  • The source is a U.S. Bank study conducted by Jessie Hagen. While this statistic is cited like crazy, it’s difficult to find the original source. Some citations, such as the one above, date back to 2011.
  • Checking her LinkedIn profile, Jessie was the vice president of U.S. Bank’s small business division from 2001 to 2006. So, the report was likely created during those years. This source puts the date around 2005.
  • Finding consistent statistics on small business failure rates is an equal challenge. This post also goes into the confusion surrounding these numbers.

Read More: Cash Flow Basics and Key Concepts 

Late payments are a BIG problem for SMEs

Cash flow management is all about timing inflows against outflows. When customer payments are late, the cycle gets all out of whack. Unfortunately, this is all too common in the SME universe. The following studies explain why:

2017 C2F0 Working Capital Outlook Survey

  • 24% of SMEs say that their customers are often late paying their invoices.
  • 28% of SMEs worldwide struggle with late payment.

2017 Sage Report — The Domino Effect: The Impact of Late Payments

  • 1 out of 10 SME invoices is paid late.
  • Late payments to SMEs total nearly $3 trillion worldwide.
  • Over 30% of SMEs experience or expect to experience a direct negative impact from late payments.
  • 10% of late payments are written off as bad debt.
  • SME spend nearly 15 days a year chasing payment on outstanding invoices.

2015 Wasp Barcode Small Business Accounting Report

  • 51% of SMEs consider accounts receivable and collections a top business concern.

Words of the Wise: Our Favorite Cash Flow Quotations 

The facts on SME credit reports

The current system for evaluating an SME’s credit history doesn’t favor the businesses themselves. Business credit reports are generated by several different organizations and most business owners don’t even know where to start in terms of managing these reports.

SMEs suffer awareness issues:

Business credit reports are complicated: 

Why this matters:

  • SMEs who understand their credit score are 41% more likely to be approved for business financing.

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

The facts on SMEs and financial knowledge

Honestly, unless you earn an MBA, they don’t teach entrepreneurship in schools. Most business owners learn as they go and any gaps in knowledge aren’t a reflection of personal fault. No single person can know everything. (Ok, we all know that one guy…)

  • Nearly 1 in 5 business owners don’t have separate business and personal banking accounts.
  • Only 39% of SMEs consider themselves generally knowledgeable about accounting and finance.

The numbers that prove why SMEs trust their accountants

Thanks to cloud-based small business accounting software, the internet and the modern age, it’s now easier than ever for SMEs to work with an accountant.

Read More: 10 Reasons Accountants Should Offer Cash Flow Consulting

The statistics on better SME business funding and risk scoring

While some of the cash flow statistics in this post may seem downright daunting and depressing, there is genuine hope for the future. Alternative financing options, like online and asset-based lending, are growing and technology continues to advance the cause of SMEs.

Read More: How Cash Flow Consulting Helps Businesses

Make your numbers work for you

At PayPie, we believe that the financing barriers most SMEs face simply aren’t their fault. In fact, our company began from a conversation where a small business software user asked, “Why can’t my lender just look at the reports I have in my account?”

Applying for traditional business financing can be tedious. So, can managing cash flow. Until now. If you’re a QuickBooks Online user, like roughly millions of other SMEs around the world, you can connect your QBO to your PayPie account and start analyzing your cash flow today.

Your interactive report, filled with insightful charts and graphs, will also contain a proprietary risk score derived from the same near-real-time data. It lets you know where you stand right now, instead of where you stood three months ago.

cash flow management main dashboard

As soon as it’s available, our invoice factoring will let you access a global marketplace of lenders in order to turn outstanding invoices into accessible funding.

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

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

5 Stories Your Financial Statements Tell

The stories your financial statements tell main image

For some entrepreneurs, putting together your financial statements can seem like busywork. You have a business to run, so can’t your accountant just whip up what you need and send it off wherever it needs to go? Theoretically, sure. But the most forward-looking business owners understand that doing the numbers isn’t just perfunctory.

That’s because your financial statements tell very specific stories about your business. What they say could have a big impact have on your company’s cash flow and future. But, it all depends on who’s looking, and, of course, the numbers themselves. (See what kind of stories unfold with PayPie’s cash flow forecasting.)

The first 3 chapters in your financial story

We’re not talking about just any financial information. We’re talking about three business financial statements very specifically — what we at PayPie (and most everyone else) look at as the accounting trifecta. Together, the income statement, balance sheet, and cash flow statement give the full picture of how your company is performing financially.

Income statement

If you’ve never heard the term “income statement” or “statement of income,” then you’ve probably heard “Profit & Loss” (or just “P&L”). Whichever term you know, they all mean the same thing.

Your income statement is the first massively important document in the trifecta. Briefly, it shows you whether or not your business is making a profit. It also reveals where you’re earning and where you’re spending — and, naturally, whether you’re spending more than you’re earning.

That alone can tell a story, but what’s especially notable about your P&L is that it tracks data over a specific period of time. Many business owners do them quarterly, and, at a minimum, yearly. Some even choose to draw up an income statement every month to be able to get a more consistent pulse on trends.

Learn more about income statements.

Balance sheet

Next up is your balance sheet. Like your income statement, this also has another name — the “statement of financial positioning.” It centers on a simple but telling equation to allow you to see your business’s net worth:

Assets = Liabilities + Equity.

In contrast to the P&L, your balance sheet looks at a specific moment in time. This is an important difference when you’re thinking about the stories that your accounting documentation tells, especially because circumstances change so rapidly in business. Due to accounts receivable and payable, among other factors, how your finances look on one given day can — and likely will — be very different compared to another. Even if it’s just a week later.

Learn more about balance sheets.

Cash flow statement

Rounding out the three, your cash flow statement. (And, our personal favorite at PayPie. Because, absolutely, we have a favorite financial statement.) Your cash flow statement — or “statement of cash flows” — shows the movement of cash into and out of your business. That includes your investments, operations, and any financing you have, too.

We mention cash flow last certainly not because it’s least. Far from it — in fact, most small businesses fizzle due to poor cash flow management and the subsequent lack of capital. Rather, it’s important to understand your P&L and balance sheet first because your cash flow statement ties directly into numbers that appear on both. It pulls from amounts on each. It also supplements them with additional insights.

Learn more about cash flow statements.

income statement and balance sheet in a financial report

What your financial statements reveal

Alone, your three financial statements certainly help you get a picture of how your business is doing. But it’s sort of like reading through a book without vowels. You can get through the story, but the words are incomplete. Plus, you won’t understand how the writer intended you to get through the book. You miss the insight into the language that having every last letter provides.

And there are a lot of stories hidden in your accounting documentation! You’ll want to make sure you understand what some of the most important big ones are saying about your company.

1. How well you budget your cash flow

Since cash flow is a big component of all three of your statements, you’d likely expect that you can gather a lot about your business’s cash flow when you look at all of them. What you can especially see? If you’re good with that cash. Which, as we mentioned before, is a major part of your company’s likelihood of survival.

Among the things those evaluating your cash position will be able to see are:

  • If you keep consistent — and right-sized — reserves.
  • If you have a tendency to hedge for emergencies or if you lean on financing often.
  • If you experience — and anticipate seasonal — fluctuation in revenues.
  • If and when you invest your cash, and how it affects your ability to pay your outstanding bills.
  • If you correctly manage your trade credit relationships.

2. How you manage your working capital

You have money to put into your business? That’s great news. Working capital is a huge sticking point for lots of small-to-medium enterprises (SMEs) who need access to more funds to initiate growth phases. Many businesses seek financing specifically for working capital, so it’s important to know if you’re using your own productively.

Your financial statements will reveal a lot, including:

  • If you’re keeping too much working capital on hand instead of investing it.
  • If, on the other hand, you’re investing too much and not keeping enough in reserves.
  • If your investments are incorrectly distributed to accelerate growth.
  • If you’ve put too many resources into one asset class versus another preventing maximum return on investment (ROI).

3. If you’re making the money you could — or should — be

Whether or not your business is maximizing its revenues can end up being a subjective conversation. There are a few things about the conversation, though, that aren’t a matter of opinion. Or, at a minimum, are less debatable than others.

Your statements will shed light on:

  • If your profit margins are too slim, and, relatedly if your cost of goods (COGS) is too high.
  • If your raw materials are increasing faster than you’re raising your prices or getting better terms with suppliers to sustain your margins.
  • If you’ve created a sustainable monthly recurring revenue (MRR) model.
  • If you’re pricing similarly to others in your sector — and making the same margins.
  • If your fixed and variable costs are on target or should be adjusted so you can net more profit.

4. Where you fall relative to industry peers

Benchmarking is an important concept in business. It’s helpful for you to know where you stand relative to others in your sector, and for outsiders evaluating your company to get an objective sense on how you’re doing. It also allows industry experts to be able to map you in your competitive landscape.

Your financial statements will help with benchmarking by:

  • If you’re growing are the same rate as comparable companies.
  • If current economic conditions are impacting you differently than peers.
  • If you’re allocating your capital in substantially different ways, or your operating costs are relatively significantly higher or lower.
  • If you’ll hit profitability before other major competitors.

5. If your capital asks are realistic

There comes a point in the life cycle of many SMEs when you’ll want to borrow money. It’s not a badge of shame — far from it, actually. Many entrepreneurs look for business financing when they want to accelerate their growth or seize an opportunity. And no amount of savvy cash flow management or diligent recordkeeping can see the future.

If you’re asking for a loan or an investment, your statements will be able to expand on:

  • If you have the cash flow to be able to pay back a lender in the case of a loan.
  • If you have consistent revenue history that makes you a good candidate for a term loan.
  • If you’re in a hyper-growth stage, or your business is on the decline.
  • If you already have a lot of outstanding debt.
  • If you don’t have enough equity left to offer.

Who interprets these stories (and why it matters)

You can learn a lot about your business from gigantic stacks of paperwork — but, other than the taxman, who cares? Many people, actually. (FYI, your income statement is of primary concern to the tax folks.) 

Lenders

When the time comes that you do want to borrow money, your financial statements matter. A lot. They’re the bulk of your loan application, and your underwriter will scrutinize them with a fine-toothed comb. (Don’t worry. They’re just doing their very reasonable but equally thorough jobs.)

That’s all to say that if your financial statements give off the wrong impression to a small business lender, you won’t get the money you might very much need. Or, with the terms you desire.

With business lending, your approval and subsequent terms are all about mitigating risk. A lender won’t allow you to borrow money if they don’t think you’ll pay it back. And, if you do get the green light, they still won’t give you favorable terms if your financials tell the story that you’re a high-risk borrower.

As they examine your accounting documents, especially your balance sheet and cash flow documentation, you want to make sure you present a super-responsible business owner. Liquidity is important here: Above all, they want to see they the story that you’re a safe bet to be able to pay back their money on time and in full.

The 5 C’s of Credit Explained 

Investors

The process of due diligence with an investor interested in your company is a short way to say “a deep dive into every financial document you’ve ever touched.” (They’ll talk to your friends and enemies, too.) As well they should! If someone is going to put their own cash into your business without any guaranteed return, you better have something better than solvent.

Of course, the quickest way for them to be able to tell if that’s the case is looking at your accounting trifecta. Investors are going to care quite a bit how you’re spending money, why you’re spending it, and your performance relative to your major competitors. If you have a good history with how your financial management, when you hire, etc, it’s a good chance that you’ll make their money work hard, too.

Investors want to see the story of your growth and your path to profitability. There are a lot of ways to illustrate that with meetings and pitch decks. You’ll have the chance to do that, but make sure you seize the opportunity to do so with your finances, too.

Potential business partners

There are lots of different types of business relationships: You could bring on a partner, acquire another company or sell your own, or simply establish a trade credit agreement with a major new supplier. Whatever you’re pursuing, all of these different arrangements are big deals. Don’t be surprised if the party you’re transacting with asks to open your books.

As good as your word is, it’s only as good as your last paid invoice or your last sale. And as much as you can find out from a business’s credit score — which is public information, by the way! Potential partners can only feel great about a major transaction, or even offering net terms when they feel satisfied that they know the story of your business.

Remember that the decisions you make with your company have implications for your partners. Poor cash flow management leads to a delinquent payment leads to turtles all the way down.

How to understand exactly what your financials say

You never want to be in a position where someone understands something about your business that you don’t. Especially anyone who’s in a position to change the trajectory of your future. So, you have to know all of the storylines that your financials contain — and know them first, and better, than anyone else.

The only way to see the whole picture is to collect all of the puzzle pieces. So, yes, that means all three statements. But it’s even more granular than that — you need all of the data and insights that power the numbers on each of those documents. Like we said before, more information empowers you, not less.

A cash flow forecast from PayPie adds a ton of depth into knowing how your business is doing. You’ll be able to understand the financial statement trifecta and make adjustments to get your company on the path it should be.  Signing up is easy — just connect your free PayPie account to your QuickBooks Online account. Your forecast is also free. Get started today! (If you don’t have QBO, hang tight. We’re working on other integrations as we speak).

cash flow management main dashboard

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

Images via Pexels and Shutterstock. 

Balance Sheet Basics for Business Owners

Camera representing a balance sheet as a financial snapshot

By definition, your balance sheet measures your business’s net worth by taking into account assets, liabilities, and equity positions. It literally gives you a snapshot of your financial strength 

Your balance sheet is part of a trifecta of accounting statements, which also includes your cash flow statement and income statement (P&L).

You have a business to run — helping empower you to do that is our job at PayPie. Part of managing cash flow with professional acumen is to know what’s going on inside your books. Here’s what you need to know about your basic balance sheet for a small to medium-sized business:

What is a balance sheet?

A balance sheet is an accounting document (financial statement) that lets you get important information about your business’s financial position at any given time. (Usually, businesses produce one quarterly or yearly — but that time period is up to you.) Sometimes also called the statement of financial position, the balance sheet is based on a straightforward equation:

Assets = Liabilities + Equity

On any balance sheet example, you’ll usually see assets on the left with liabilities and equity on the right. Sometimes, in a vertical format, assets will be on the top of the balance sheet, with liabilities and equity on the bottom. Either way, it’s a pretty readable, accessible document.

As you’ve likely come to understand around anything related to accounting, there’s more to your balance sheet than a list of numbers.

More Tips: Income Statement Basics 

Your assets

This is the good stuff. Your assets include your tangible holdings, both liquid and illiquid. For example, think cash and equipment, respectively. Your inventory would be included here, too.

When listed on your balance sheet, you might subdivide these into things like fixed assets (real estate, machinery) and current assets (accounts receivable, petty cash). That’ll help you get a better picture of what you can access and quickly convert to funds should you need to.

You might also be wondering about things like patents, trademarks, or intellectual property (IP). Technically, IP and similar holdings are also considered assets — although these are classified as “intangible” assets, which are different. And, unsurprisingly, much harder to value. (Relatedly, many investors dispute the exact worth of intangible assets — and value them differently on an individual basis.) (Unless you hold the patent for a best-selling soft drink, velcro or breakthrough in quantum computing.) 

Your liabilities

Any debt lives here. If you’ve taken on business financing, for instance, that loan principal and its interest will live within your liabilities column. Business credit card balances, too, as well as outstanding invoices.

This also includes your operating expenses. Your overhead needs to be counted here: Think salaries and benefits, rent, and any taxes you’ll owe, too.

Like your assets, an organized business owner will find it advantageous to organize liabilities by type, too. A good way to consider them is as current (utilities, taxes) or long-term (mortgage, loan interest). This’ll also come in handy when you’re trying to see if your cash flow projections will cover you for both now and down the line. Plus, you’ll be able to figure out if you’ll have the liquidity to reinvest retained earnings (onto that next).

Your equity

Equity (also known as shareholders’ equity) is the last piece. You’ll figure out whether you have any equity in your business when you subtract your liabilities from your assets. You can also think of this as net assets. As such, you’re going in the right direction if the number is positive — that means you have more assets than debts. 

There’s one more step to get the full picture of your retained earnings. In other words, the money that’s actually left to reinvest into your company. If you have investors, you’ll have to distribute any remaining dividends. However, account for shareholder payments before you get your final equity number.

More Insights: How to Read a Cash Flow Statement

income statement and balance sheet in a financial report

What your balance sheet tells you

Your company is like a living, breathing organism. Or, it certainly feels like that because everything is constantly changing. When things are moving so quickly, it sometimes seems impossible to freeze time on any given day and ask, “How are things really going?”

Your balance sheet is the closest tool to being able to do just that. A balance sheet is a financial snapshot of your business at a specific time. It’s like a photograph in the sense that it captures a moment. But, that also means that it’s not like a time-lapse video, which is why you’re not going to want to rely on it for any kind of historical or trend info.

Why you need a balance sheet

First of all, if you’re an S-corp or a C-corp, you need to provide one to the Internal Revenue Service (IRS). That’s just the law. But, think of this less as of why you’d need a balance sheet and more of why you’d be at a disadvantage without one.

  1.  To know how you’re doing relative to industry benchmarks.

How’s your financial position relative to others in your sector? Where’s your money going relative to others? Are you holding onto way more working capital, or do you not have enough cash? The answers to these questions will all be different depending on a company’s needs. But you should know where you fall relative to others. Especially if the info is out there.

  1. If investors come knocking, they want to understand your distributions.

If you’re in the lucky position in which investors want to put money into your company, a balance sheet will be one of the absolute most important documents they’ll evaluate. Foremost, they’ll look where you’re allocating your capital, how much cash you have on hand, and even if you’re holding onto unnecessary working capital or other assets. Equally, they’ll be able to tell how you’ve managed your business based on the liabilities you’ve racked up.

  1. To get the whole sense of your company’s finances.

Remember how we mentioned a balance sheet was like a photo, not a time-lapse? Well, in order to get to that long time-lapse, you need that singular photo.

Read More: Reporting, Cash Flow and Financial Health

Balance Sheet

Where your balance sheet fits into the big picture

Filling out an accounting balance sheet alone isn’t enough to manage your business to its fullest potential. Those assets and liabilities you documented on your balance sheet? Your Profit & Loss (income statement) shows where that money went, when you spent it, or the avenues through which it came in.

Your cash flow statement and balance sheet start work in lockstep. Your balance sheet shows your net cash, and your cash flow statement uses that number as the basis of its documentation for your cash position. Any time anything related to cash on your balance sheet changes, your cash flow statement changes too.

Cash flow statements and forecasts both pull information from your balance sheets and income statements. Establishing a regular practice of creating cash flow forecasts helps you create a historical record of your cash flow that can be used to track trends and make informed predictions. (Think snapshots turned into a time-lapse sequence.) 

cash flow management main dashboard

Getting a sense of your liquidity

If you feel like this all keeps coming back to cash, you’re not going crazy. Your balance sheet, working in conjunction with the income statement and cash flow statement, let you as a business owner ensure that you’re in the financial driver’s seat.

And a lot of that has to do with cash: Making sure you’re not spending too much cash in the present, that you have enough of it for later, and that it’s allocated in the right places for the future.

Part one of optimizing your business’s cash flow is having all three of these statements organized and up to date. The other is having insightful cash flow forecasting and risk assessment (included in your forecast) at your disposal (completely free of charge) in order to start seeing the patterns in your inflows and outflows.

PayPie integrates directly into QuickBooks Onlineand signing up is quick and easy. (No photography lessons required.) (Other integrations are on the way.)

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

Images via Pexels and Shutterstock. 

10 Reasons Accountants Should Offer Cash Flow Consulting

ccountant offering cash flow consulting

If you’re an accountant who serves small to medium-sized enterprises (SMEs), why should you consider providing cash flow consulting as part of your value-added services?

If like us, you’re dedicated to giving businesses the tools they need to forecast cash flow and strengthen their long-term financial health, here are 10 reasons why you should offer cash flow consulting:

  1. Most businesses are small businesses

Globally, there are more small businesses than any other kind of business. Consider these numbers: 99.9% of all US businesses, 97.9% of Canadian businesses and 99% of all businesses in the world are small businesses.

Most accounting firms are also small businesses. For example, 90% of all accounting firms in the United States have less than 10 partners or owners.

Case Study: Cash Flow Consulting in the Real World 

  1. Accountants are trusted advisors

Like attracts like. If you’re a small business looking for a professional accountant, are you going to go knocking at the door of a major accounting firm with retainer fees as high as the skyscrapers that house their employees?

Or, are you going to look for a small to medium-sized accounting practice (SMP) that’s more reasonably priced and more likely to understand your needs?

The answer is obvious. It is also why most small businesses consider their accountant their most trusted advisor.

  • A majority (92.2%) of accountants provide basic accounting and bookkeeping services.
  • Only 77.7% offer business consulting services, like cash flow analysis and forecasting.

Offering cash flow consulting will give you an edge on the competition. At the same time, it will also help you forge stronger bonds with your clients.

cash flow consulting opportunity

  1. Cash flow is a small business killer

More than half of small businesses never make it past the first five years. The main culprit is cash flow.

  • Studies of the U.S. market conducted by Wasp Barcode have found that 33% of small businesses said cash flow was a top business challenge and 44% found cash flow a top accounting challenge.
  • A similar SCORE study indicated that 22% of small businesses said that cash flow was their main concern.

It’s not that these businesses don’t understand that they need to have the right amount of money to meet their financial obligations. Instead, they just don’t have the correct tools, technologies and processes in place.

By helping your clients master cash flow management, you’ll be teaching them vital survival skills. You’ll also be building mutually respectful long-term relationships.

Forbes Article: How SMEs Can Win the Battle for Positive Cash Flow 

  1. There are intuitive forecasting tools

You don’t have to go and design proprietary systems to create a powerful and meaningful cash flow analysis. Automated tools, like our free cash flow forecasting, make it simple to create an informative, intuitive report filled with key ratios, charts and graphs.

All you have to do is connect the business’ QuickBooks Online account with their free PayPie account, then run the report. The forecast is built using the near real-time data from the company’s QBO account. (Integrations with other accounting software and platforms are coming soon.)

You may run a free cash flow forecast on a monthly, weekly or even daily basis.

PayPie Cash Flow Forecast Example

  1. Technology is changing everything

“CPAs with technology: You have the power to change your customers’ lives.”

Jody Padar, CPA, MST, Accounting Today

With the rise of cloud-based technology, these three trends are changing how small business accountants are interacting with their clients:

  • Digitalization— As more small business data is available digitally, through the use of accounting software and applications, it’s also easier for accountants and bookkeepers to access this information.
  • Virtualization — Because cloud-based technologies can be accessed from any device with an internet connection, it’s no longer necessary for accountants to physically visit clients. Accountants and businesses can work together from virtually anywhere.
  • Transformation — With the greater availability of near-real-time data, accountants are moving from generalized to specialized services.

Read More: How Cash Flow Consulting Helps Businesses 

  1. Cash flow consulting builds value

“The ability to provide business intelligence from a quick analysis of data is a miracle.”

— Geoffrey Moore, technology author and business consultant

Complying with regulations and paying taxes are services that business owners see as have-to-dos. Accountants who take the creation of financial statements one step further by producing cash flow forecasts are transforming routine tasks into recurring, value-added services.

Rather than merely reporting results, cash flow consulting is a key component in business growth. Some advisors even set up monthly consultation calls or video conferences with their clients to discuss goals and objectives — literally becoming voices in the business decision-making process.

Pro Tips: Cash Flow Forecasting — What You Need to Know 

  1. Business financing goes hand-in-hand with cash flow consulting

As you help businesses better understand when, why and how the cash flows in and out of their companies, your clients may also rely on your advice for short-term and alternative lending solutions.

In addition to standard options, like term loans, lines of credit and credit cards, you can also introduce the businesses you serve to innovative financing solutions, like invoice factoring, powered by blockchain technology.

  1. Better cash flow lowers risk

The cash flow forecasts created using PayPie’s insights and analysis also contains a risk score that summarizes and reflects several key variables linked to cash flow. This indicator shows how a business is viewed by lenders, vendors and other third parties wishing to do business with them.

Helping a business improve their cash flow also improves their risk score. With a better risk profile, businesses can access funding more easily and set more favorable terms with vendors.

Cash Flow Basics: How to Read a Cash Flow Statement 

  1. Better cash flow builds confidence

As you work with your clients reviewing cash flow, setting goals, controlling costs and planning for future investments and opportunities —you’re not only improving the business’ financial health, you’re also bolstering the owner’s confidence.

As you go through a cash flow forecast, especially the day-to-day costs involved in operational cash flow, you get a better sense of where the client’s priorities lie, which concepts they understand the most and the areas that need the most improvement.

In a nutshell, you’re able to ask the hard questions and offer informed solutions that truly benefit the bottom line.

  1. Cash flow consulting makes you a better advocate

“Running a small business is about the grind, the day-to-day operations and finding a way to keep your head above water. Like the shock of cold water in the ice-bucket challenge, reality can hit you hard and all of those hours picking paint colors for the office suddenly seem wasted. Small businesses inherently overlook the technology platforms that help them manage their day to day — and that’s exactly how cash flow begins to erode.”

— Stacy Gentile, Forbes Communication Council

Managing finances isn’t always the most alluring part of owning a business, but it’s fundamental for success. Cash flow consulting takes the implementation of best practices and better tools to a new level by delivering tangible results in the form of more cash. And no one can dispute the value of money in the bank.

Be a cash flow advocate — try our free cash flow forecasting for QBO users today.

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

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

Image via Shutterstock

Choosing a Business Banking Account

Choosing a business banking account

It’s already hard enough to open your bank account, scroll through your expenditures and remember exactly when and where you made each purchase. That task would become exponentially more difficult if you added your business expenses into the mix — you’d have to mark each payment as professional or personal, then figure out the rest.

That’s why it’s so important to open separate bank accounts for both areas of your life. Some business owners go so far as to choose two different banks — one for their professional dealings, and one for their personal expenses. The clear separation makes it simpler to stay on top of all your financial standings. Separate accounts also lead to more straightforward tax filings and improve your company’s transparency.

Of course, you can’t do it without choosing a business banking account to start. At PayPie, we know how difficult this task can be without a little guidance. As we’re also all about guiding small and medium-sized businesses, like yours, on how to improve cash flow, here are our best tips for selecting the right place to keep your money:

1. Consider the services you’ll need

It’s simple to shop for a bank that meets your personal financial needs. You know how much money you have, the type of interest rate you want and the ease with which you can find ATMs around town. But choosing a business banking account means having to tick more boxes. It’s up to you to discern which services are vital to you and your company before choosing a bank.

Every business owner’s banking needs will be different, of course, but required features tend to include:

  • Checking and business savings accounts
  • Online banking access
  • Credit cards and deposit-only cards
  • Access to discounted accounts for employees
  • Wire transfers
  • Payroll features
  • Retirement accounts and insurance
  • Discounts on other services, such as shipping and office supplies

You might want a bank that offers lending or other financial services. Some banks will provide further benefits, too, such as checking incentives, overdraft protection and discounted fees for inter-bank transfers. Depending on the ways you’ll use your bank, you can compare each company’s features before settling on the right bank for you.

Learn more about separating business and personal finances. 

2. Compare large and small banks

Well-known names in banking have reached their height for good reason. They’re convenient — if you travel from city to city, you can probably find a branch of a national bank wherever you go. They may also have better interest rates and might be able to provide a longer list of services.

But a smaller bank has a hand in the local market, which means they’ll be more interested in the success of your business. They might be more inclined to give you a loan because they know it will help the economy to bring another company into the mix. They can offer tiered interest rates to compete with bigger banks, along with other incentives. The personal touch will sometimes extend to tougher times, too. If you’re late on repayment or if you overdraft your account, for example, a local bank might not hit you with as many fees as a bigger branch would.

Contrast the merits of local banks with better-known brands when choosing a business banking account. Again, it’ll be important to know what you need before embarking on your search, so you can choose the bank that’s best for you.

3. Ask other business owners

As a small business owner, you already know the importance of networking with other business owners. You can connect in person, online or even at networking events. Regardless of how you do it, though, you’ll find fellow entrepreneurs vital in your search for the perfect business banking account.

That’s because established business owners have already charted the course you’re on right now. They’ve been through the process of choosing a business banking account based on the criteria you have in mind. They also have experience with the places you’re considering. So, reach out to your contacts and ask whom they use. They might have incentives to help you — some banks give clients referral bonuses so the conversation will be mutually beneficial.

Of course, you might find the results of these conversations inconclusive, or you might not know any business owners whose banking needs compare to your own. In that case, you have the internet at your fingertips. Do some online searches to find customer reviews of the brands you’re considering. You should always take extremely positive or negative reviews with a grain of salt. More moderate accounts of what’s good and what’s bad will be more helpful to you in your search.

4. Bond with your banker

Once you’ve landed on the right bank for you, don’t stop there. Instead, try your best to work with the same banker every time you reach out to your branch for help.

For one thing, you’ll be happy to have a familiar, trusted face guide you through something as stressful as your financial dealings. But a trusted banker will also know what types of services might suit your needs, even if you didn’t initially ask for them. They’ll find discounts or improved rates, all of which will enhance your company’s standing without much effort on your part.

Discover 7 ways to boost cash flow. 

5. Bank with confidence

Perhaps the most important tip of all when choosing a business banking account is to go with your gut. Which financial institution makes you feel the most secure? You’ll have an easier time deciding if you’ve done the research to point out the type of services you need, uncovering the banking options you have and asking for others’ opinions.

At PayPie, we’re all about making your financial needs simpler to fulfill — and banking is just one of our areas of expertise. Explore our website and see all the ways we can make your business’ finances stress-free with the click of a button.

Having a business bank account that meets your needs is just one component of managing your cash flow. At PayPie, we’re all about giving you the tools you need to manage your cash flow — starting with cash flow forecasting and risk scoring based on the business data in your accounting software.

QuickBooks Online users can get started today. (Other platforms are coming soon.)

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

Image via Pexels.

Cash Flow Consulting in the Real World

cash flow stories Lucid and Groove

Technology is transforming the landscape of small business accounting. Empowered by the automation and innovation fueled by artificial intelligence (AI), the cloud and blockchain — now, more than ever, accountants are expanding their roles as business advocates and advisors.

It’s a trend backed by a 2016 study by the International Federation of Accountants (IFAC), which found that 41% of entrepreneurs believed accountants were their most trusted advisor — nearly double that of the 21% for other business consultants.

Many of the accountants advising the small to medium-sized businesses (SMEs) are small to medium-sized practices (SMPs) themselves. What kind of help do SMEs need? One of the main areas driving demand for advisory services is cash flow consulting.

Cash flow consulting in the real world

Here’s a real-world account of how SMP, Lucid Advisory & Finance, helped SaaS help desk software provider Groove find its rhythm with cash flow forecasting, budgeting and everything else.

Lucid Advisory & Finance

Lucid Advisory & Finance founding partner, Nick Bird, has discovered that helping businesses better understand the basics of cash flow and cash flow forecasting (through cash flow consulting) is having a huge impact on the startup, SaaS and crypto companies his firm serves.

“When we first meet with a client, we ask them, ‘Where do you want to be in five years?” he explains. It may seem like a broad question, but the answers are quite telling.

“If you don’t know where you want to go, it’s really hard to make a plan to get you there. Tracking your metrics, including cash flow, isn’t just an abstract chore, it’s a tool for better decision-making.”

In fact, his favorite part of his job is seeing his clients flourish, make well-informed decisions and grow their business.

Nick Bird Lucid Quote

How businesses benefit

According to Bird, once business businesses start looking at their cash flow and financial metrics more carefully, they also gain:

  1. Confidence — Through better, more informed decisions.
  2. Accountability — By comparing performance to projections.
  3. Peace of mind — Knowing that they’ve taken greater control of their financial health.
Read more: Cash flow 101 — the basics

How cash flow consulting works

As part of the cash flow consulting process, financial professionals like the team at Lucid will review a business’ cash flow statement on a routine basis. The time period, like holding monthly recaps, depends on the specific needs of each business.

If a business doesn’t have a cash flow statement, their advisors will either use accounting software to create a basic statement or take advantage of integrated solutions, like PayPie

By reviewing cash flow statements on a regular basis, companies are able to see how the cash flows in and out of their businesses in terms of day-to-day revenue and expenses, as well as capital investments and borrowing activities.

What businesses can learn 

Through this process, a business can pinpoint when most of their regular bills and responsibilities, like payroll, hit the books — in comparison to when the bursts of revenue come in. For example, for an SaaS company, this would be when the subscription fees are processed.

Knowing this cadence helps a business be more precise in knowing when their cash reserves are highest and lowest. Over time, these patterns are used to create cash flow forecasts that serve as performance benchmarks.

3 benefits of cash flow consulting

How cash flow informs decision-making

As metrics change and there’s a drop, the monitoring helps provide insight into where the problems may lie. Conversely, if things hold steady or improve, a business can take confidence in knowing they’re on the right track.

They can also use this information to plan their next steps. Is it time to hire new staff? Develop a new product? Raise prices? All of these decisions are affected by cash flow, which means the more you know, the better decisions you make.

More tips: How to read a cash flow statement 

Case study: helping Groove chart an even course

When Bird first met, Groove founder and CEO, Alex Turnbull in 2016, Turnbull was like most startup CEOs. He was hyper-focused on his product. Yes, he checked the business’ banking account. But, he didn’t track any key performance indicators (KPIs) and he certainly hadn’t been spending the few hours reserved for eating and sleeping for keeping the books.

It’s a scenario that’s all too normal. It’s not a criticism of entrepreneurs. Starting your own business is HARD. Unless you’ve been through it before — most businesses, even the high-tech ones, don’t always realize how vitally important cash flow management and cash flow consulting really are.

A breakthrough in the form of a trusted advisor

Because they’re busy getting their businesses off the ground, concepts like working capital or debt-to-equity ratio aren’t always top of mind for business owners. While everyone wants to avoid a cash flow crisis, no one is building a damn or even watching the water to see if there’s impending doom.

“Alex is a bootstrapper. He’d put a ton of sweat equity into his business. He’s also an amazing marketer and the Groove blog is one of the best SaaS startup blogs I’ve ever read. But, he wasn’t an accountant and there’s nothing wrong with that.” says Bird.

cash flow story Alex Turnbull Groove Quote

Baby steps…

Once Bird and Turnbull discussed Groove’s needs and goals, Lucid got things rolling by creating a one-year budget and, in time, a three-year budget.

In conjunction with the long-term forecasts, Bird and Turnbull meet monthly to go over Groove’s financials. A typical agenda, looks a little something like this, with reviews of:

  • Previous action items
  • Overall performance
  • Trends
  • Variances
  • Projections
  • Staffing

Grown-up questions

By answering questions, like the ones below, Lucid helps Groove make more precise, data-driven decisions.

  • How quickly do you want to reach this goal? (“Now” is an acceptable answer. The question after that is, “Is this realistic?”)
  • What resources do you have right now — and what will you have in a few months?
  • What level of cash in the bank are you comfortable with?
  • How is the business performing compared to this time last year?
  • What options are available if the detestable Mr. Murphy and his famous law make an appearance?

Big picture thinking

“The awesome part of doing this is that we were able to help Groove manage their cash flow so efficiently, they could hire as quickly as needed to get the next update up as quickly as possible,” says Bird, genuinely excited about the results. (There’s really something to be said about having a passion for what you do.)

Turnbull concludes, “I’ll admit. I approached asking for help with cash flow and financial management with about as much enthusiasm as dental work. Thankfully, I met the right team. Now, when Nick gets me to open my mouth, it’s always for the greater good of my business. The only pain is a few really bad jokes now and then.”

“In all seriousness, the process has been transformative. There’s truth to the adage that says it’s better to work smarter than harder. I sleep better at night knowing there are no financial monsters hiding in my closet.”

Real-life cash flow stories matter

At PayPie, we believe that businesses should be empowered with the best tools to give them insights into their cash flow and manage their overall financial health. It’s also why we offer our cash flow forecasting and risk scoring free of charge.

Whether it’s the businesses themselves or the accountants and bookkeepers who serve them, we make it easy to look at your finances, without looking away in frustration.

Want your cash flow story to be told? Tell us here. We’re looking for real-world cash flow management and funding stories from businesses and the professionals who advise them. 

Thank you

In closing, we’d like to personally thank Lucid and Groove for sharing their cash flow consulting story. Their experience truly shows how an openness from both sides yields a much greater good.

Bonus content:
The untold stories of Nick Bird and Alex Turnbull

When everyone has their professional hats on, it’s easy to forget the human side of what we do. Here’s a little about Nick Bird that most people may not know: He’s one of seven children. He lived in Brazil and speaks Portuguese and is a single father to two children.

When Alex Turnbull isn’t building startups, he’s probably on a surfboard somewhere along the coast of Rhode Island. Alex and his wife have a dog named Honey Badger. There’s no word on whether or not the pup can surf.

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

This story is being shared on an informational basis only. Every accounting firm and business has their own unique needs. Be your own success story by taking the time to find the right fit.

Image via Pexels.

Improving Your Cash Flow in a Click

Do you remember the last time you tried to get some quick financing for your business? I bet it wasn’t the best of experiences, right? These procedures usually take forever and still give you a less than satisfactory answer in the end. Even when trying multiple sources at a time can be frustrating since they all can take forever to make a decision that should be decided in seconds instead of weeks.

Gladly, technology is bringing the ultimate solution for this recurring pain point. Starting early next year, things are going to change and a new opportunity will be created where you will be able to get instant financial approvals against your outstanding invoices. Using a simple process, you as a business connect your accounting data with PayPie and let the magic happen.

PayPie will analyze your relevant financial transactions and will assign the most accurate credit risk score for your business. This will enable you to radically change the performance of your business since your data will be automatically integrated and you won’t have to manually enter any data or invoice. The days of making mistakes and wasting time entering data in different platforms are over.

If you are one of the millions of businesses using online accounting software like QuickBooks Online, Sage, or Xero, you are in for an early treat. You will be among the first ones to harness technology to solve your cash flow problems.

We will integrate with all major accounting software so that we fit naturally into your workflow to become an app that you love and use on regular basis. PayPie will truly deliver end-to-end intuitive experience that is easy to use right from within your accounting software.

PPP token holders are creating efficiencies through technology and automation for you allowing you to focus 100% on your business so that you can take advantage of the countless business opportunities that unveil.

The liquidity provided can be used for further inventory purchase, equipment purchase, or just to hire a new employee to catapult your marketing efforts. We are here to help your business grow and ensure long-term success. With PayPie at the heart of your short-term liquidity needs, there is no better friend today.

Sign up for our short-list now and we’ll promptly inform you once we’re are ready to take live credit risk score of your business to the pool of worldwide lenders, first time ever powered by the blockchain: https://goo.gl/forms/sdDMx1ANQ532aN9I2

 

 

Image: GraphicStock