Some e-commerce business owners believe that profit is more important than cash flow. In case you have the same belief, it is time for you to change your mind as we are about to enlighten you on the importance of cash flow.
Imagine this scenario. If a businessman sells most of his goods and gains a big profit, the profit won’t be beneficial to his business unless it is on hand. A regular cash flow allows businesses to operate smoothly.
According to a study conducted by Aon, more than 60% of Small and Medium Enterprises (SMEs) in Singapore depend on bank loans to solve their cash flow issues and supplement their business growth plans. Read on to discover how an increase in cash flow can help your business.
- 1 Difference between Profit and Cash Flow
- 2 How to Calculate Operating Cash Flow Ratio
- 3 Useful Cash Flow Management Tips to Grow your Business
- 4 Benefits of Maintaining Healthy Cash Flow
- 5 Stay on Top of your Finances by Getting your Paperwork in Order
Difference between Profit and Cash Flow
Every business owner needs to know that profitability and cash flow are not the same.
Cash flow refers to the net amount of cash and cash equivalent that is transferred into and out of a business.
Profit refers to the financial gain from a business when the revenue generated from the business activity surpasses expenses, costs, and taxes associated with the activities involved in the business.
A profitable business can still find it difficult to pay bills. In fact, a business can meet all its financial obligations and still not make any profit.
Timing is the most important factor that determines the cash flow of a business. For instance, you may struggle with cash flow on a particular day or week even if your business makes a lot of money over a month or year.
Although profit is very important in business, the progress of a business doesn’t depend solely on profit. Instead, it depends on cash flow. If your company is unprofitable on paper, then you will need to make an adjustment somewhere. You may have to reduce your expenses or increase sales in order for the company to gain profit. However, note that it is still very important to monitor your cash flow even when your business appears profitable on paper.
How to Calculate Operating Cash Flow Ratio
The operating cash flow ratio, which is the same as the liquidity ratio, indicates whether the cash generated by a company can repay all its current liabilities.
Here is a straightforward formula to calculate operating cash flow:
Operating cash flow = Cash flow from operations/current liabilities
You can check your company’s statement of cash flow to see the value of cash flow from operations. Otherwise, you can also calculate cash flow from operations using the formula below:
Cash flow from operations = net income + non-cash expenses + changes in working capital
Note that current liabilities refers to all obligations, which will due within a year. Those obligations include accrued liabilities, accounts payable, and short-term debt.
Useful Cash Flow Management Tips to Grow your Business
You must know how to manage cash flow if you own a company. Here are some simple tips that will help you manage cash flow effectively and grow your business:
1. Maintain your books properly
You should keep a record of every transaction you carry out because records will help you track your expenses and profits. Records will help you save a lot of time when declaring your profit for tax purposes. In case you are too busy to handle your bookkeeping by yourself, you can outsource it to experts. We have experts that you can hire if you require bookkeeping services.
2. Monitor cash flow
One of the reasons why it is important to monitor cash flow is that you will have the financial resource to make necessary adjustment as soon as anything goes wrong. It also allows you to make adequate financial plans and avoid unnecessary debts.
We recommend that you monitor your cash flow daily. If you do this daily, you will be able to avoid excess expenses and see clearly whether your company is making a profit or loss.
One of the quickest ways to monitor cash flow is by paying close attention to your current financial situation. Check how quickly you get payments from your clients and how quickly you spend the money your company is making. If you notice any issue, then you should take prompt steps to correct the issue.
3. Forecast the following month’s cash flow
A time may come when cash is not available. A good cash flow forecast allows you to prepare for periods when cash may run low. It is always important to make plans ahead because it is difficult to overcome unexpected challenges if you have no plans.
Although there is no guaranteed method of forecasting the exact cash flow you need for a particular period, you can use the past records of your expenses and income to get a good estimate of the required cash flow. Forecast your cash flow every week is a good practice. If you feel comfortable forecasting your cash flow every day, then it is even better to forecast at the end of each day.
Benefits of Maintaining Healthy Cash Flow
There are many benefits that you will enjoy when you maintain a healthy cash flow. Here are some of the benefits you will gain:
Meet and pay obligations at the appropriate time
Healthy cash flow allows your business to make timely repayment. As we all know, timely payment strengthens the relationship between a business and its working partners. By practicing so, if by chance you are unable to pay on time, your working partners are likely to extend credit terms since they are aware that you usually make payments at the right time.
Alleviate the pressure of unexpected expenses
While the future is very unpredictable, businesses can still manage to cope with unfavorable circumstances if they have been maintaining healthy cash flow for some years. Also, adequate cash flow will allow business owners to have peace of mind knowing they can meet all their financial obligations. This allows business owners to focus on how to expand their business.
Grow the business
Having a positive cash flow gives you the opportunity to grow your business without depending too much on external resources. Even if you really need a bank loan, you will be privileged to discuss repayment terms since you are in a strong financial position.
Moving your business online can showcase your goods and services to more audience.
Learn more about e-commerce businesses:
- How to set up an e-commerce business in Singapore: read guide
- All you need to know about tax regulations for e-commerce businesses in Singapore: read guide
- Top 7 e-commerce platforms to start selling on: read guide
- Statistics on e-commerce landscape in Singapore: read guide
Stay on Top of your Finances by Getting your Paperwork in Order
We know that it isn’t easy to start and run a business, which is why we are here to provide assistance. Records is one of the key ingredients that validates your business and helps you see how your business is progressing. In case you need any form of assistance with your paperwork, contact us today. We are willing to contribute to the success of your company.
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