Track These Metrics to Monitor the Pulse of Your Business’ Cash Flow

Understanding your cash flow is essential to the health of your business. A strained cash flow will limit your potential, stopping you from taking advantage of new opportunities. In fact, a very limited cash flow could push your business into debt as you lose more in costs than you bring in. You need to be aware of your cash flow to make the best decisions for your business.

According to QuickBooks, the Small Business Administration found that a problem in financial structure is to blame for 28 percent of business bankruptcies. Unless you understand your cash flow, you could be next. Here are the key financial metrics you need to monitor to understand the state of your cash flow.

1. Accounts Payable

How much money needs to go out your door? This metrics includes all the bills you haven’t yet paid like payment for materials, supplies, contractors, and more. It’s a good idea to calculate the accounts payable that you owe now and estimate next month’s figure too. You should compare both to the next figure: accounts receivable. 

2. Accounts Receivable

How much money is owed to you? Your accounts receivable is the total of funds your clients should have paid you already. If your accounts payable is higher than your accounts receivable, you have a problem. If they are tight, you also have a problem. You need to be able to bring money in quickly to stay flexible and competitive. When comparing these figures, don’t forget to write off bad debt, or your accounts receivable will be inflated and misleading.

3. Time Worked for Small Businesses

The smaller your business the more relevant your time worked will be to your overall business cash flow. If you’ve worked significantly less, perhaps due to illness, you can forecast a reduction in accounts receivable. Cut back on accounts payable, or be in the red.

4. Free Cash Flow for Corporations

Larger, more complex businesses will benefit from looking at free cash flow over time worked. You’ll need to find your earnings before interest, tax rate, depreciation, amortization, and add them. Then subtract your capital expenditure, like mortgage payments and equipment costs, and subtract any change in net working capital. Free cash flow can help you ensure you’re not cutting into your business’ cash flow too much.

5. Cash Burn Rate for Start-ups

If you’re a funded start-up, it’s critical to monitor your cash burn rate and ensure you’re not limiting your cash flow by over-spending. You need to increase your accounts receivable before your “cash runway” ends.

The Solution: Accounts Receivable Financing

No matter your business size or type, if you have cash flow problems, you need to get the money owed to you in the door faster. Accounts receivable financing is a cost-effective way to do that. J D Factors will take care of your business invoicing for you. Send us an invoice and we will pay you for it within 24 hours, and then invoice your clients or customers on your behalf. With invoice factoring you’ll see a healthy cash flow is right around the corner.