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Managing Cash Flow in Quickbooks Online

Updated: Mar 14, 2022

At Financial GPS, we encourage our clients to look at all three financial statements (Income Statement, Balance Sheet, and Cash Flow Statement) together, but we urge them to pay particularly close attention to the statement of cash flow and here's why - businesses die when they run out of cash, full stop! Somesurvives companies, like tech startups for example, can go years without revenue as they focus on growth. However, no business survive without cash. Cash is the most important asset on the balance sheet.

Why Cash Flow is the Most Important Element of a Healthy Business

People oftentimes may focus on the Income Statement and the Balance Sheet which istheir both reports are very crucial; however,that the Cash Flow Statement trumps them all. So, why should we put our focus on cash flow management? To begin, the cash flow statement report is a measurement of the amount of cash that comes into and out of your business in a particular period of time. It is truly the lifeblood or oxygen of any business. Cash is what enables business owners to continue to do payroll for our beloved employees, pay vendors, and invest in equipment. They say that:

“Revenue is vanity; profit is sanity; but cash flow is reality” -Anonymous

A positive cash flow indicates that the liquid assets are increasing. With that said, a negative cash flow indicates that a company’s liquid assets are decreasing. Note that liquid assets are often viewed as cash, and likewise may be called cash equivalents because the owner is confident the assets can easily be exchanged for cash at any time.

How to Calculate Free Cash Flow

Anyone that is in business needs to have an understanding of a few basic terms. Here’s the breakdown of what goes into the formula and what each term means:

Net Income = Revenue - Expenses + Non Cash Expenses - Increase in Working Capital (current assets - current liabilities) - Capital expenditures

Revenue and Expenses

Revenue and expenses represent the flow of money through a company’s operations. Revenue is money your company earns from conducting business. Expenses are the costs you incur to generate that revenue. To remain profitable, a company’s revenue must exceed its expenses.

Non Cash Expenses

Expenses on a cash flow statement are items that decrease the amount of cash available. Items placed under the operating expenses section of a cash flow statement are things that reduce current assets. Expenses under investment activities are expenditures for purchasing long-term assets. For example, the cost of new manufacturing equipment or the land and building for a new retail outlet are listed in the investment activities. Some of the few common non cash transactions include (but not limited to):

  • Depreciation is the reduction in the value of an asset with usage.

    • Example: a car that you just got the key to, depreciates once you drive it out of the lot. This does not mean the value of the vehicle decreased, it just means that you are using the vehicle, and with usage comes with some wear and tear.

  • Amortization is paying off a debt over time in equal payments. Some examples of intangible assets include: patents, copyrights, trademarks, etc. Here's how you can calculate it.

    • Example: if you have a 30 year mortgage, it'll be paid off after 30 years.

  • Unrealized gain/losses is the potential profit/loss that happened already on paper but the relevant transactions have not occurred.

    • Example: a common example of an unrealized gain is actually an increase in the price of shares designated as available-for-sale by the holder of the shares. Vice versa with unrealized loss.

  • Deferred income taxes are a liability recorded on a balance sheet. They are taxes that a company will eventually pay on its taxable income, but not yet due for payment.

Working Capital

Working capital, also known as net working capital (NWC), is the difference between a company’s current assets, such as cash, accounts receivable (customers’ unpaid bills) and inventories of raw materials and finished goods, and its current liabilities, such as accounts payable (Investopedia). It's important to know that a profitable and efficient business should have current assets be more than current liabilities, or you will not be able to pay off the short term liabilities/debts. Here's a video on how it is calculatedthe and how it can be put to use in making the right business decisions.

Capital Expenditures

Capital expenditures (CapEx) is a payment for goods or services recorded on the balance sheet instead of expenses on the income statement. The company uses capital expenditures to acquire, upgrade, maintain physical assets such as property, technology, or equipment (Investopedia). Here's a video on what items are considered CapEx, and which of those items go on which report.

Cash flow is calculated by making certain adjustments to net income by adding or subtracting differences in revenue, expenses, and credit transactions (appearing on the balance sheet and income statement) resulting from transactions that occur from one period to the next.

Tools to Manage Cash Flow in Quickbooks Online

Most entrepreneurs rely on the Balance Sheet and Income Statement but the Statement for Cash Flow should be the most frequently reviewed report, it’ll tell you the sources and uses of your cash. The statement of cash flow is the most misunderstood and least reviewed by CEOs, so here’s a video on how to properly read and understand the cash flow statement.

Financial GPS investigated and looked into a Quickbooks Online integration that specifically helps business owners or their accountants to plan the business cash flow. The Cash Flow Frog app, automatically pulls and analyzes Quickbooks Online data, and develops a cash flow forecast based on historical accounting records. Here's a video on how you can plan your cash flow with Cash Flow Frog.

Having an insightful tool like this one, can help business owners make better decisions. This may even help increase long term profits with the extra support with the dashboard. The price for one user is free, it includes all the core features so try this tool out today and see how it’ll change your business in the most positive way.

Daily Cash Flow Report

It seems that cash flow is the most underdog report of them all - but it is quite the opposite! This report is what will make or break a business if not regularly evaluated. Cash flow is a key indicator of financial health so do not miss this one! In real estate, they say: location, location, location. In business, it’s: cash flow, cash flow, cash flow! Here’s something to remember from the book Scaling Up:

“Have your available cash reported DAILY, with a short explanation of why it changed in the last 24 hours, and chart it against accounts receivable (AR) and accounts payable (AP ) weekly. You'll learn so much more about your business when you see how the cash if flowing on a daily basis.“ (200) - Scaling Up by Verne Harnish
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