Newsletter and Subscription Sign Up

Small Business Health: It’s All About the Cash

Published Friday Dec 7, 2018

Author Nancy DuBosque

Small Business Health: It’s All About the Cash

How do you know you have a successful small business? The best measurement tool in your diagnostic toolbox is your cash flow statement, which provides information about where a company spends its money (cash outflows) and where that money comes from (cash inflows) over a select time period.

Besides monitoring cash expenses, studying a cash flow statement can also help you make decisions that create excess cash. For example, monthly leasing versus a one-time capital cash outlay for equipment can stabilize cash position throughout the year. Deciding on a shorter turnaround for receivables creates cash. And probably one of the most hard-learned lessons in the small business world is that efficient and timely management of inventory creates cash. The ability to improve a company’s cash position creates better business value overall.

You can also test a company’s liquidity and short-term viability by studying the cash flow statement. Analyzing a monthly or quarterly statement provides a deeper look into how a company’s cash position changes over time. This results in a realistic analysis of cash peaks and valleys throughout the year and the opportunity to make timely and healthy decisions about investing in operating and capital expenditures, such as marketing and the purchase of equipment.

There is no question that the availability of cash is critical to growing a company. Cash comes into play regardless of whether you are looking to borrow money, raise outside capital or use excess cash from your profits to invest back into the business.

“There are so many moving parts that constantly change, so we rely on current and accurate financial data to make critical decisions to support growth and performance. These areas include taking on debt and increasing our marketing budget,” says Julie Lapham, founder and CEO of POPZUP Popcorn Company in Dover.  

Cash Flow vs. Profit and Loss
A company may look profitable from the profit and loss (income) statement, but be running out of cash according to the cash flow statement. Even though the profit and loss statement is, along with the cash flow statement and balance sheet, one of the core three financial statements every company should analyze quarterly and annually, looking solely at the profits of the company is a mistake business owners often make. The profit and loss statement does not reflect the real story of how cash is flowing into and, more important, out of the business. Potentially large cash debt expenses, such as principal on commercial loans, does not show up on the profit and loss statement. These expenses, if not carefully monitored using the cash flow statement, could eventually put a company into the red.

The cash flow statement is where you find a company’s key performance indicators. For example, it tells you where and how cash is spent.

If you increase inventory, you spend cash. If you extend credit to customers, you spend cash. If you buy equipment or make capital improvements, you spend cash. Is enough cash coming in to cover these expenditures? This ebb and flow of cash will not show up on your profit and loss statement.

The Balancing Act
Most small businesses look at profit and loss and cash flow statements regularly, but many do not understand the importance of their silent partner, the balance sheet.

The balance sheet offers a way to see what your business is actually worth by evaluating the company’s assets, liabilities and equity. Assets are cash, properties or things of value owned by the business. Liabilities are amounts the business owes to creditors. Equity is the owner’s investment or net worth. A healthy balance sheet will indicate that the assets are equal to, or balance out, the liabilities plus the equity.

Typically, if the ratio of a business’s assets to liabilities (or current ratio) is less than 1:1, the company is in danger of bankruptcy and will have to make some strategic moves to improve its financial health, often through restructuring debt or increasing cash inflows.

“The balance sheet has two very important pieces of information that determine the health of an organization: One, current ratio, which is the result of dividing current assets by current liabilities; and two, debt-to-equity ratio, which tells the reader how leveraged the company is and thus how risky any further debt might be,” says Bob Elliot, CFO of Monadnock Economic Development Corporation in Keene.

It is important for business owners to get familiar with some of the simple financial ratios tied to the balance sheet used to determine the current value of a business. This lets business owners plan strategically in applying for additional loans or credit, finding investors, or ultimately putting the business up for sale.

“I have learned from my business experience that understanding how to read a financial statement is vital to understanding the health of our business. Analyzing cash flow and balance sheets provides our management team the ability to understand liquidity, debt and other metrics that help us grow the business,” says Elizabeth Curcio, co-owner of White Apron Catering in Dover. “Without much of this information, I would feel blind and would not be able to adequately plan for the growth of the business.”

Ultimately, the cash flow statement and balance sheet work hand in hand.

Anyone looking to value a company will appreciate financial statements that reflect both a strong positive cash flow and strong cash assets, indicating that the company is in good health and has the opportunity to grow.

Nancy DuBosque is regional director of the NH Small Business Development Center–Keene Region at Keene State College. She can be reached at 603-358-2602 or

All Stories