087 Understanding Cashflow Basics for Small Business Bookkeeping
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We're diving into the essential topic of cashflow basics for small business bookkeeping. If you've ever wondered what cashflow is, why it matters, and how it differs from profit, this episode is for you.
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00:00:00
Hello, I'm Regan Bashara. I'm your host for this episode of money. Through ease. Well, I'm the host of all the episodes. I don't know why.
00:00:08
I said it.
00:00:08
Like that. But today's episode is going to be the start of a small series that I'm doing all about cash flow basics, and if you are a small business owner and entrepreneur.
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You have a side hustle. You are a start up business owner or you've had a business for a long time and you just want to be better organized and more literate about your business finances.
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Then you're in the right place. This is the podcast for the numbers, which I've been doing bookkeeping and small business accounting for over 10 years. I've been a business owner for two years now. I started my online virtual bookkeeping firm in 2022, and I'm so happy to have you here.
00:00:53
Really nice to know that people are listening and that they enjoy the content that I put out and I want to invite you to get on my e-mail list.
00:01:02
Recently I changed to doing just once a week newsletters and that will always be free of course, but in the newsletter I give you some tips, some ways that I can support you for that week and I even do a little tarot card reading every single week for you and give you some self-care if you're not already.
00:01:22
Go subscribe to my e-mail list, get that weekly newsletter, and you'll also get some other goodies from me that are complete freebie downloadable.
00:01:30
Things and I want to talk about one of those things in this series. So if you listen to the cash flow basics series and you're not on my e-mail list yet, make sure you get on there because subscribing to my newsletters means that you're going to get one of the tools, one of the resources that I created.
00:01:51
And that I'm going to share about in the cash flow Basics series. But into the show the script.
00:01:58
Or you can go to alleaseaccounting.com and subscribe to my e-mail list there and the mission for this podcast is to help you achieve financial ease by seeing the magic in your numbers. I call myself the numbers which we are all about looking at our data, having the data at our disposal.
00:02:18
And then being empowered by our data here. So today's episode topic is going to be about the cash flow basics. We're going to define what cash flow is we're going to talk about why it.
00:02:28
And then in the next episode, we're going to talk about cash flow management tools and technology that I really like and talk about how to do cash flow analysis for your business. But let's start off with why cash flow matters. It's really important that we all have an understanding of what cash flow is.
00:02:48
And how to manage it? The importance of cash flow is crucial to your business's survival. If you want to be in business for any amount of time. But most of us are in this for some sort of longevity, and we want our business to survive.
00:03:06
All of the ups and downs, all of the crises that are going to happen, the good times and the bad. If you want to be able to survive all of that, you need to have an understanding of cash flow, not just good cash flow or positive cash flow, but an understanding of how we define that term, what it means for your business, what your cash flow.
00:03:27
Because it's not the case that if you have negative cash flow, you're going to die and have to close your business and have to go back and work for somebody else in a 95, that's not necessarily the case. Cash flow changes all of the time, but it's important to.
00:03:44
Expect to be unexpected. I guess I want to say if we can expect when your business is going to have pitfalls when the crisis come up, we have a plan for you to take action to avoid, you know, any detrimental like financial losses. If we can understand and manage your cash flow well.
00:04:05
That means that you will be ready for those events because they will have.
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Then and more on that later, I'm going to do some episodes talking about like failure and all of that. So subscribe to money through ease if you're not already, cuz that will be coming up too. But business is kind of about failure. Business is kind of about making a science experiment out of all of this.
00:04:28
Trying new things, learning what works, learning what doesn't, and then moving forward. But there's going to be things that happen that you don't necessarily anticipate or you didn't plan for.
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And having a good understanding and a good management of your cash flow is really going to go far, take you far in business, take you through those unexpected pitfalls or crises that are going to happen. And then of course understanding your cash flow is important for goal achievement because if you want to set financial goals in your business and you want to meet them.
00:05:01
We have to have a way to even look at your cash flow. We have to have a way to look at that data. So a couple of the common cash flow challenges that small businesses face all of the time.
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Time.
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Me personally, my clients, people that I am in community with in the entrepreneurial community, some of the common cash flow challenges that we see, number one is like learning how to pay yourself as the business owner. And I do have some podcast episodes where I talk about that.
00:05:33
And you can of course purchase the bookkeeping Foundation kit, which is my quick digital course to help you set up and maintain a bookkeeping system and do your bookkeeping the right way. I go a little bit into that course about how to pay yourself as the business owner, and I have a couple of my free public podcast apps.
00:05:53
Foods that I referenced in the kit that are going to tell you how to do that, but you can just go back in the podcast feed and look for those episodes about paying yourself as the business owner. This goes for people who are side hustlers. This goes for people who are sole proprietors. They actually have a business. It's their full time gig, but they don't have any employees.
00:06:14
And then there comes payroll. When you hire employees, or even if you have independent contractors like a virtual administrator.
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A virtual assist.
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Even if you are paying contractors, you're paying employees that can be challenging for a small business, for a brand new business, a newer business that can create those cash flow challenges. But what we talk about here on this podcast and my philosophy is that you should be paying yourself 1st and you should figure out how to pay yourself.
00:06:44
First, before you start hiring and paying other people another common cash flow challenge that I see is this irregular revenue or irregular income because the business's income, if you are a sole proprietor, your side.
00:07:00
Seller, you don't own the business, you don't have partners or other shareholders in the business. When you are a sole proprietor, you're not incorporated. The businesses income is your income. You get to claim the business expenses to reduce that income.
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But we all.
00:07:15
Have experienced kind of the hills and valleys of business revenue.
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We have all been on that roller coaster ride at some point.
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Of being a business owner and the irregular income part is challenging especially.
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If you've always.
00:07:31
Worked a nine to five corporate kind of job. If you've always had a regular paycheck because you were hourly or salaried and you become a business owner all of a sudden.
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It's not so cut and dry anymore, unless you have like people on a subscription or like a, you know, monthly engagement or a retainer or something or you have like very consistent sales each month. If you sell products.
00:07:59
Unless that's the case, which it's not for a lot of people, you're going to have irregular income. You're going to have ups and downs. You're going to have periods of time where it's feast and then periods of time where it's famine. And this can be a real challenge for people with their cash flow. And then of course comes time to file your taxes.
00:08:20
And this is obviously a very challenging thing because when you go from working a corporate job, receiving a paycheck, being a W2 employee, and then you go to business ownership, all of a sudden you're being taxed differently.
00:08:34
Because now you're paying taxes on the profit or whatever is leftover in your business after revenue and expenses have all been accounted for. So now we have this new tax obligation and especially if you are very successful when you create a lot of revenue in the very beginning of your business, you will quickly come to realize what that means. When you go to file your tax.
00:08:57
And that's when we would start having the conversation about should you be, should you make the election to become an as corporation to become incorporated and then pay yourself and owner's salary because that changes how you get taxed a little bit. Not too much, but your business, if it has, if you have a pretty big.
00:09:17
Individual tax obligation when you're a business owner, it might be time to consider whether or not to elect to be an S Corp and to elect to pay yourself with the salary and that.
00:09:30
First year that you kind of realize that when you realize your business is so profitable that you only have a limited number of expenses to take up against your business revenue and that creates a tax liability that creates a pretty big tax bill for some people and that can be extremely challenging to try to figure out when the right time is to make that as corporate.
00:09:52
Because it does require you to be able to pay yourself and owners salary. The tax thing is confusing for a lot of people. I've done some episodes on it, or if you have ever taken one of the free webinars that I've.
00:10:05
On you will have heard me talk about the way that business owners get taxed and most of the people that I talk to are sole proprietors. Some of them are as corporations. They are incorporated and so they pay themselves an owners salary. But the majority of people that I talked to do not pay themselves a salary. We take what's called.
00:10:25
And owner straw. And when that's the case, you're not having taxes with.
00:10:28
Build. It can really wind you up with a big tax bill at the end of the year, and so you have to be able to manage your cash flow in your business, paying yourself and knowing what's coming up whenever you file your taxes. It is a very delicate balance that we need to strike, and it's hard to do if you don't have the financial literacy. If you don't have the terminology.
00:10:51
Now, like the language is a barrier to understanding your money sometimes, which is why I do what I do here.
00:10:58
But that can be something that we need to talk about. And if you want to learn more about that, we can do a consultation together. That link is also in the show notes if you want to book a consultation with me because it gets a little more complicated and I can't necessarily give you advice one way or the other, even on a consultation, but like at the very least, I can help you understand what's going on.
00:11:20
But it's really hard to do on a podcast when I don't exactly know your situation. But I'm talking to many people at once, so let's move on to the definition of cash flow. Cash flow is the way.
00:11:34
That money moves in your business. It either moves out of your business or it comes into your business. And so we're going to call that cash inflow whenever it comes in and cash outflow whenever it goes out kind of self-explanatory. But if you think about like a bucket of water and we have.
00:11:55
You know, someone pouring water into the top of the bucket that is in flow.
00:11:58
And then someone drills a hole in the bottom of the bucket and that is the outflow of the water. The cash, right. So the definition of cash flow is just describing what's happening with cash in your business at any given moment or for any given time period. And the difference between cash flow.
00:12:18
And profit is a pretty big difference, but I think some people complete this. You know when we say, oh, I'm in the black or oh, I'm in the red being, quote UN quote in the black means that your business has a profit. That means that after your revenue is added.
00:12:35
Up and then your expenses are subtracted from that revenue. What you're left with is a positive number that is having a profit in your business, but having a positive having a profit doesn't necessarily mean you'll have positive cash flow. They are two different numbers that come from two different equations. Profit is revenue.
00:12:55
Minus expenses, cash flow takes into consideration all of the other things that happen in your business, including investing activities and financing activities. And we'll get into that in a.
00:13:07
But the profit is different from cash flow because cash flow takes into account transactions that don't go on your profit and loss statement and your financial reports. Most people know the profit and loss, the P&L and if you don't already, when you have like a loan payment or you pay.
00:13:27
Sales tax or payroll taxes, or you purchase an asset like a piece of equipment or a vehicle for your business, or you take your owners draw. None of those show up on your P&L, on your profit and loss statement that.
00:13:42
Influences your cash flow, loan payments, tax liabilities, asset purchases.
00:13:48
Owners equity distribution. Taking your owners draw all of that affects your cash flow and it does not.
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Go into the profit equation. That's why profit and cash flow are two different things. So let's talk about what makes up your cash flow. What are the components of your cash?
00:14:06
Number one is your operating activities. This should be pretty obvious, but things like your overhead costs, your business expenses, things like paying rent for your business, utilities, payroll, purchasing supplies, purchasing cost of goods because you need to purchase something to resell it or you purchase supplies to create a product that.
00:14:26
That you then sell all of these are operating activities and that is part of your cash flow. Of course, revenue is the in.
00:14:34
Flow of an operating activity whenever you make a sale or you provide a service and someone pays you, that is revenue to your business and that is part of cash flow. The 2nd component of cash flow is investing activities. So any way that money is invested into the business from you, the owner or if it's an escort.
00:14:55
From the shareholders, shareholders investing money into the business, whenever assets are purchased, such as a piece of equipment for your business or a vehicle, all of these.
00:15:05
Are examples of investing activities. This is where we're taking money.
00:15:10
And we're like.
00:15:11
Just putting it back into the business, right and it can be cash coming in from an owners investment or it can be whatever the profit is in the business being reinvested by purchasing an asset or something. And then there are financing.
00:15:26
Activities. That's the third component of cash flow now financing basically just means whenever you get a loan.
00:15:33
Anytime you get some sort of money from credit and loan funds are distributed to the business for any reason. So we talked a little bit before about how the accounts receivable in your business, which means what other people owe you. All of the invoices that you're waiting for people to pay on, that's your accounts receivable.
00:15:53
And that is an asset to the business because.
00:15:56
Business owners can.
00:15:57
Leverage their accounts receivable to borrow money against. There are business lines of credit and business loans where the capital that you put up just like for your mortgage, you put up your house.
00:16:09
To loan to get the money.
00:16:11
To buy the house, the loan for the house.
00:16:14
Your accounts receivable is the capital that you put up sometimes for business capital loans. So you're being loaned money based on the fact that other people owe you money and that is a way that financing is used for businesses to increase their cash flow. Money's coming into the business.
00:16:34
When you take out alone, but it is expected to be paid back at some point. So this is where we create a liability. Whenever you have business.
00:16:44
That, and it is meant to be paid back, or you've agreed to pay it back at some point. That is a financing activity that impacts your cash flow when you get the loan, you first have, you know, a huge influx of cash. And then as you're paying the loan back on a month to month basis, more than likely that is cash going.
00:17:04
Out because you're paying back that loan, you're sending the money back out, plus some interest because interest is what we pay to be able to borrow, borrow money. Let's talk about a couple.
00:17:16
Of the sources of cash inflows into your business and this is obviously revenue, when people pay you money for products or services that you provide to them, this is loans like we just talked about that is money coming into your business when you first take the loan disbursement, then there's owners investment.
00:17:36
So if you are a sole Member LLC, a sole proprietor, and you take your personal money and invest it into the business, which is what everybody has to do when they start a business, they have to invest some sort of personal funds usually.
00:17:51
That is a cash inflow to your business that's putting cash into your business and a very, uh, not typical way to have cash inflow in your business is to sell an asset. So if you have a piece of equipment in your business that you decide you don't need anymore and then you sell it, that would.
00:18:08
Be cash inflow you'd be bringing.
00:18:10
Passion of the business trading out an asset. Right and here's.
00:18:14
A couple of.
00:18:15
Ways that we can improve your cash flow because.
00:18:18
A lot of people see what their cash flow is on their reports and they freak out and they're like, OK, well, I got to have positive cash flow, right? Otherwise I'm burning through money and that is what we're going to talk about next week. But today I want to share with you some of the strategies that I know to help you improve that cash inflow. And number one is timely.
00:18:39
Invoicing and if you are invoicing your clients or customers and you're waiting for them to pay you back, making sure those invoices go out on time on a consistent basis is super important, right? But.
00:18:53
Following up with people following up is a huge part of the sales process, but making sure that people know that they have an open invoice that needs to be paid, talking to them about why they haven't paid it, if it's overdue, offering them some other payment terms if they need it like you managing.
00:19:12
Your accounts receivable consistently is going to improve your cash inflow.
00:19:19
And then of course, selling like you just need to sell more. That's right, Reagan. Just sell more. It's as easy as that. I know it's easier said than done, but focusing on selling, advertising, marketing, networking with other people, letting folks know what kind of offers you have, asking them if they want to buy it, all of that goes into selling.
00:19:40
But putting a big focus onto selling where your focus goes.
00:19:46
Energy flows, right? So if we put our focus onto selling and I like to say, put your whole ***** into it if you put all of it into selling, that's where the energy is going to go, and you're going to see a return on that after some period of time. For some people, it's very quick. Some people, it takes a little bit longer, but putting your energy.
00:20:06
To selling means that you'll have better cash inflow and then of course diversifying your revenue.
00:20:13
The sirens are coming because they want you to know that you should have diversified revenue in your business. Very important. We'll just wait for that ambulance to pass by hope everybody's OK. Diversifying revenue is super important in your business. If you pigeonhole yourself into one offer and.
00:20:34
You have trouble selling that offer or it doesn't really meet a need in the market, and no one's interested in buying it, which I don't really believe would ever be the case, but you can wind up with poor cash inflow because you have not given people options on.
00:20:51
Your services or your products and now this is coming from somebody who has 50 million ideas a day about different revenue streams. If you want to get on a consultation with me and brainstorm some revenue streams and how to diversify your revenue streams, I'd be so happy to do that because I'm really good at it. But I'm good at it in a way that I can come up with all these ideas.
00:21:12
And then somebody needs to implement them. Somebody needs to actually make it make sense, like put it into the logical format that it's supposed to be in and then sell it and keep up with it and all that good stuff. I'm good at diversifying.
00:21:26
Not super amazing on the follow through and not every idea needs to be chased. Not every rabbit needs to be chased down that rabbit hole, but diversifying your revenue even.
00:21:38
A little bit.
00:21:38
Creating different offers that are at different price points will mean that you can reach a larger number of people.
00:21:45
You know, you'll be able to serve a larger number of people and you know, bundling things is a great way to repackage a product or a service that you have. And the 3rd way that you could improve your cash inflow. And I'm not necessarily recommending that you go out and do this.
00:22:01
But it is getting financing. It is leveraging the credit that you have available the capital, the collateral that you have available and financing, getting a loan, getting a credit card that you manage well. And I know not everybody's great at managing credit and if that's a goal that you have or you.
00:22:21
You know what kind of spender you are, you know, check in with that and make sure that you are going to be able to manage that the way you want to and be smart about it. But financing is totally a way to improve.
00:22:32
Move your cash flow to take in a little bit more cash if you need to invest in something in the business, right? If you need to grow your business, grow your sales team, grow your workforce, grow your audience, get more engagement, whatever right, create a new product, create a better product than you were before.
00:22:54
Financing can be the tool or the resource that you use to be able to do that. Not saying that you have to not saying that everybody should. I'm I'm hoping that you would be smart about that if you did.
00:23:09
Choose to get a loan to get some financing to improve your cash flow.
00:23:14
Try the other things first. Try sending out invoices in a timely, consistent manner. Try selling what you already have to offer better and for longer and more and try diversifying your revenue before you go out and seek any sort of financing. Finally, let's talk about understanding.
00:23:34
How cash flows out of our business? So here are some of the sources of cash outflow. So when money leaves your business, this is in the form of operating expenses.
00:23:45
Overhead costs like paying rent, utilities, supplies, cost of goods sold, all that good stuff, right? This is all of your overhead costs. Basically what it takes.
00:23:57
To run your business. What kind of expenses do you incur simply by opening the doors? This is also repaying on your loans, so cash flows out of your business when you pay back those loans. When you took the loan?
00:24:11
At first, when you financed and took that money, that loan money upfront, that was cash inflow to your business. Cash outflow is when you start paying it back and then the last type of cash outflow that I want to talk about is equity payouts. Your owners straw that you take your owners equity that you pay to yourself because you do need to.
00:24:31
Pay yourself.
00:24:32
This is if you have shareholders, you know paying dividends to.
00:24:36
Shareholders, etcetera. And a couple of the ways that you could improve your cash outflow would be first of all knowing if you want to.
00:24:45
Reduce your cash outflow.
00:24:47
I don't know anybody that would want to increase their cash.
00:24:52
Unless they were like.
00:24:54
I don't even know. Yeah, most people would just want to reduce the amount of cash that flows out of their business. And so that is when we talk about your overhead costs, what are you paying for to operate your business that you actually don't use or don't need? It isn't an.
00:25:12
Because if we need to reduce the cash flows out of your business or at least stop the leaks, looking at your overhead costs, looking at your operating expenses, if you have to purchase costs of goods like if you have to purchase supplies and materials to create your products or to sell your services.
00:25:32
Take a look at changing your vendors or your suppliers for those cost good.
00:25:37
Because there may be an equal product or a better product even out there that you can purchase for the same price or cheaper, and that reduces the amount of cash flowing out of your business on a regular basis. Another way to reduce your cash outflow that I didn't see when I was kind of like.
00:25:57
Picking up some examples of this was refinancing loans or consolidating loans because it may be that you can refinance a loan and you're still paying the same every month, but you pay that loan off quicker or you have a lower interest.
00:26:12
Rate and so your cash outflow on a monthly basis doesn't necessarily change, but paying off the loan quicker.
00:26:20
Means that you'll reduce your cash outflow sooner, more quickly than if you were just to keep the loan at the rate it is now. Consolidating loans also a great way to reduce cash outflow. You might be able to consolidate a couple of loan payments and pay less a month.
00:26:38
And pay them off quicker. That could be possible, right? So those are a couple of the ways strategies that I wanted to share to improve your cash outflow. So let's recap what we talked about today. We are talking about cash flow and this is the first in a short mini series about small business cash flow.
00:26:58
But today we defined what cash flow even means, how to understand the ways that cash flows in and out of our business. I gave you some examples of that. We also talked about the difference between cash flow and profit because they are two different.
00:27:13
And why cash flow is important for you to understand as a small business owner and if you need to look at your cash flow, the 1st place you're going to go look is in your bookkeeping. If you don't have bookkeeping, then you need the bookkeeping foundation kit, and that will be LinkedIn. The show notes it is a short digital course that I created.
00:27:32
It has three parts to help you set up a simple and consistent bookkeeping system.
00:27:37
And as a free bonus, because I know that if you take a self-paced course online, you're going to have questions come up. I am giving you 30 days free access to my private entrepreneurial community. That way you do have somewhere to come ask those questions when they come up. So purchase the bookkeeping foundation.
00:27:57
It's just $77, you get 30 days free access to the community, which will include all of the material and content that I've put out the entire time the community has been open, which is all of this year. Go grab the bookkeeping foundation kit at the link in the show notes, or you can go to bookkeepingfoundationkit.com.
00:28:14
Next week, we're going to be talking about my favorite cash flow management tools and I even have a free resource for you, so make sure you're subscribed to the newsletter because you will see that free resource come out as well and I want to invite you to subscribe to this podcast if you haven't already, and leave me some feedback or rating.
00:28:34
Will review lets me know that I'm doing a good job and that I'm putting out content that is useful to you, and it also helps rank the podcast better so that it can reach other business owners who are struggling with their business finances.
00:28:48
So thank you so much for tuning into this episode of money. Through ease. Check the show notes and follow me on the social medias if you're not already. I would love to interact with you and hear your thoughts about this or any other episode. I'll talk to you all next week.