One of the fundamentals of owning and operating any business is ensuring that the company has the necessary cash to pay for expenses while still turning a profit. Using quarterly and annual reporting systems, you can determine your company’s cash flow over several accounting periods.
In order to make intelligent financial management decisions, you must analyze the cash flow statement. If you have an established agency and are looking to expand, investors will analyze a company’s cash flow statement (in addition to a balance sheet and a profit/loss statement) to determine if a company possesses the ability invest in business growth.
If you’re a start-up agency, the chances are that any cash in the business is money that you have personally invested. Before you place your first nanny, you’ll need to track the outflow of cash so that operational expenses do not deplete your initial investment.
There are three parts to a cash flow statement:
Operations/Working Capital:
The cash flow resulting from operational activities is an important aspect of your company’s financial health. This is the cash flowing in and out of your company on a day to day basis. Some of the variables are:
- Cash received from customers (including credit card charges)
- Salaries
- Overhead costs; administrative/maintenance costs
- Expenses such as office supplies, rent, and utilities
- Operational income such as interest income, service fees or rental payments
Capital Expenditures/Uses:
This section is used to detail the cash influx/spending when investing in your company or another business; in other words, it’s an analytic tool used to measure the success or failure of those investments. These include:
- Property investments
- Proceeds from the sale of other businesses
- Lending cash to another business
- Vehicles
- Manufacturing Equipment/Machinery
- New technology
Finance:
The last section of a cash flow statement calculates how the company raises money. This can include:
- Repayment of borrowed money
- Repurchase of previously sold stock
- Notes/Bonds payable
SCORE, a non-profit organization dedicated to helping small businesses has a free cash flow statement template you can download. Once you’ve completed each section of the cash flow statement, it’s time to analyze it. An agency in good shape has positive cash flows, which illustrates that profits exceed expenses. Smart business owners use this extra capital to grow their agency or seek out other business opportunities to invest in. If your nanny agency is creating negative cash flow, it has spent more cash than it has generated. While outside financing and investing your own money in the business will keep it afloat in the short term, it is not a sustainable solution. Try a long-term amortized loan which includes interest and principal.
Inc.com, a website and monthly publication focused on growing companies, recently conducted a interview with Philip Campbell, a CPA and former chief financial officer at several companies and author of Never Run Out of Cash (Grow & Succeed Publishing 2004) about how to best manage your cash flow. In the article, he outlines tips on how to improve cash flow to your business:
- Collect receivables: invest in a lock box, which is basically a P.O. Box at a bank that will process your checks. Choose one bank to do business with and implement a pre-authorized check system so that banks can draw against client accounts at timed intervals
- Tighten credit requirements: Ask potential customers to fill out a credit application and provide references before you extend a credit line to them
- Increase sales: There are two ways to increase sales; new customer acquisition and selling more products to existing customers. This is an excellent opportunity to examine your marketing plan and lead generation system
- Pricing discounts: Offer your clients a discount to incentive them to pay earlier than required; take advantage of this option with suppliers to secure your own discount, which will decrease outbound expenses
For more information about sustaining a financially secure nanny agency, download the e-book: For Experienced Nanny Agency Owners: What’s Your Exit Strategy?