Every business owner wants to see their business reach long-term success. However, first-timers often struggle to figure out how to recognize how their business is going. There are several ways to assess your business’s stability, but cash flow is one of the most effective. When you have a healthy cash flow, you know your money is working for your business, not against it.
But how do you assess cash flow? PayWhirl is here to give you some tips on how to figure out if your cash flow is healthy and, if not, how to get it there. Let’s get started:
Take a Look at Your Business Structure
One vital step for assessing cash flow is to make sure your business is using the best business structure. There are several types of business structures that define how the IRS views and interacts with your business. Most of them cost money, often with annual fees depending on your state. The big exception to this is running your business as a sole proprietor.
Sole proprietorships are the default business structure recognized by the IRS, and it doesn’t cost anything to run or maintain one. You pay business taxes quarterly, and your business income is included in your personal income on your tax forms. There are some drawbacks to this structure, as it doesn’t provide much in the way of legal protections. However, businesses that don’t take on much risk can benefit from this affordable structure.
How Are You Funded?
When first-time business owners assess cash flow, they tend to overfocus on how money goes out of their business. However, it’s also vital to take a look at how money comes into your business. Many businesses have plenty of funding, but they’re mainly funded through loans. Although substantial borrowed funding can make your business feel stable in the short term, it can hurt you down the road.
If you have debt, you don’t need to panic. However, you can improve cash flow by working on paying off debt and moving toward being mostly (or ideally, entirely) self-funded through transactions and subscription payments. Consider working with a financial advisor to figure out how to pay off debt quickly without incurring fees or sacrificing your business’s short-term stability.
Are Your Investments Working For You?
Another good way to assess your business’s cash flow health is to assess the ROI for what you’re investing money in. This can include anything from services and products to employees and inventory. You should make sure that you get more back from these investments than you’re putting into them.
For example, you might decide to hire a web designer to make sure you have an attractive and professional business website. However, over time, you realize that you’re not getting increased traffic online or improved business. This is a decent sign that your investment isn’t paying off when it comes to the bottom line. You either need to take a new approach or reinvest entirely.
A Final Note on Cash Flow
First-time business owners might not think to assess their cash flow until they feel like something has gone wrong. However, it’s best to take a look at cash flow health regularly. This helps you establish a baseline for your business, and can empower you to keep your business strong. When you know how money flows in and out of your business, you can catch and address issues before they become serious problems. We hope this article helps you learn how to make cash flow analysis a standard part of regular business maintenance so you can take the reins and make your company thrive
Author: Amy Collett