Every business should set clear objectives and performance goals before it begins operations. Setting the right direction is the key to a successful business.

Existing businesses should also evaluate their performance critically and must keep a track record of their key performance indicators (KPIs) including the cash flow targets.

Cash Flow Questions Every Business Should Ask

One way of analyzing the current state of business affairs is to ask a few basic questions to yourself. You can do the same for a startup or a new business in the early stages as well.

Let us help you answer these key questions related to cash flow management and help you set the right tone and achieve sustainable growth in the long run.

Does Our Business Have the Right Data Insights?

Every business set KPIs according to its business objectives and mission. KPIs ensure your business performance remains aligned with these objectives.

In today’s data-driven business environment, it is pivotal to have access to the right data insights. It is only possible when you have a robust accounting system that keeps a digital record of your account books.

Once you start using data, your business performance will improve significantly. You’ll be able to track every business performance metric including cash flow analysis.

Without critical access to data, you’ll always make misinformed decisions as you’re likely to miss key data analysis points.

Therefore, try answering the very basics of setting up the right accounting and financial system for your business before you dig deeper.

What are our Business Objectives and Cash Flow Goals?

Then, evaluate whether your business objectives and cash flow goals align. It simply means your cash flow management should make the same efforts as the rest of the business.

For example, if you aim to build a cash-intensive business in the long term, you must pursue an aggressive cash flow management policy to achieve that objective.

It would translate into a shorter accounts receivable and longer payable cycle. Similarly, you’d pursue invoices more aggressively than other businesses.

This way, you’ll align your short-term goals like cash flows with the long-term business objectives of achieving a sustainable cash flow without relying on external financing.

What are Key Products and Their Cash Flow Streams?

The next question is to determine your cash cows. Which products from your business suit bring the most cash to the table and which ones spend the most?

Remember, your best and the most profitable products may not bring the highest cash to your business. Therefore, it is essential to critically differentiate between profitable and liquid products at this stage.

The aim should be to identify products with a higher cash flow stream and protect them. Similarly, to identify the products with the least cash-producing products.

Then, you’ll either discard those products with negative cash flows or take corrective actions to generate positive cash flows.

What is our Operating Cash Margin?

The operating cash flow margin or the operating cash flow ratio is an important ratio when evaluating your business’s financial performance.

It is the ability of a business to pay liabilities from current cash flows. It is calculated by dividing “net cash flows from operations” by the “current liability” figure.

If the ratio is equal to or greater than 1, your business is generating sufficient cash flows to pay for current liabilities including loan payments, accounts payable, and so on.

However, if this ratio is less than 1, your business is facing cash flow issues.

Also, it is an important financial ratio but it only gives you an idea about paying for current liabilities with net operating cash flows. In practice, you’ll need more cash from operations to pay for other liabilities as well.

How Accurate is our Break-Even Point?

The break-even point of a business is when income and expenses are equal. In simple words, it is the point when the business is neither making a profit nor a loss.

However, the key point here is to link the break-even point with cash flows. If you have set the wrong break-even analysis, even the profitable business will lack adequate liquidity.

Thus, when analyzing the break-even point for profitability, you should also focus on creating a break-even point for cash flows.

What are our Accounts Receivable and Payable Policies?

The working capital cycle directly relates to accounts receivable and accounts payable policies.

Ideally, you should prolong the accounts payable cycle. However, it often comes at the cost of damaged supplier relationships. So, you should create an optimal payables cycle.

Similarly, you’d like to keep a shorter accounts receivable cycle. That again will damage customer relationships. Offer early payment incentives, and discounts on prompt payments, and pursue invoices aggressively.

Managing these two critical elements will boost your business cash flows significantly.

Is our Debt Financing Adequate?

Continuing with our question above, if your working capital cycle is not ideal, you’ll end up with more external debt financing.

At first, debt financing brings the benefits of tax savings and a cheaper cost of capital. However, if you’re relying too much on debt financing, most of your cash will go to interest payments.

It will dry up your cash resources quickly and will keep your business under pressure consistently. You may end up with a vicious debt trap as you’ll again look for further financing to fulfill business needs.

Are We Generating Positive or Negative Cash Flow Consistently?

Keeping an adequate financing level means saving cash for other business requirements. Similarly, resolving some key questions asked above means generating and saving more cash for your business needs.

Finally, sum up the equation by answering if your business is generating positive or negative cash flows.

A positive cash flow means higher cash coming into your business than going out. The higher this value the better it is for your business.

How to Answer these Common Questions with Pelrio Accounting?

These are some of the critical questions that every business must ponder when trying to sort out cash flow issues.

At Pelrio, we suggest incorporating a comprehensive financial management system that fulfills the accounting and financial needs of your business when it comes to choosing the right accounting software.

Access to Key Data Insights

Remove bling data spots from your bookkeeping logs. Create digital and dynamic account books with simple yet effective accounting software like Pelrio.

For instance, categorize expense and revenue streams and analyze each one categorically. Then, experiment with scenario planning.

All of that is possible only when you have access to key data insights for your business.

Dynamic Cash Flow Forecasting

Cash flow forecasting sets the foundation of a cash flow management system in any business. Again, leveraging access to digital accounting records is the first step.

Dynamic and flexible forecast plans can be adjusted with changing cash flow metrics. It gives you the right information at the right time to adjust your plans as required.

Improved Cash Flow Analysis

With expense control, better data insights, and flexible forecasting, you’ll get better cash flow analysis overall.

It means better planning and analysis of the cash flows of your business. That in turn will improve the business performance in the long run as well.


About Pelrio

Pelrio is a simple expense & cashflow management tool that utilizes artificial intelligence to provide real-time analytics, dynamic forecasting, and expense control for small business owners

Questions, comments or feedback? We’d love to hear from you. Get in touch by sending an email to info@pelrio.com

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