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Fully understanding your cash flow can help your business grow exponentially. The first step is to analyze three financial statements in particular: balance sheets, income statements, and statement of cash flows.
The balance sheet gives insight into the current financial condition of a company. It shows a company’s current assets, liabilities, and stockholders’ equity. The income statement shows the revenue and expenses in a certain period of time and helps you to figure out the “bottom line.”
However, the statement of cash flow is most important. It allows you to understand “the future needs of your business, where your current cash reserves look like, and what past mistakes caused your company to lose out on a profit-maximizing opportunity,” says our partners at Seller Accountant. They note that it is crucial to not get distracted by just your company’s profits and losses. If you solely look at your company’s balance sheet or income statement, there is a possibility that you could miss the fuller story about your business’ finances.
We often see this in our E-commerce business customers. For example, just looking at profits and losses, a company may exhibit a loss. But, looking at the whole statement of cash flows, a business may still be able to function with enough cash on hand.
Using the standard “accounting formula” (assets= liabilities = shareholder equity) is common for many company. However, for e-commerce businesses, it can be difficult to put a number to your assets.
Cash and inventory are both assets — typically, having more of one leads to having less of the other. Well run companies want to have enough inventory, but if you hold too much inventory, you may become short on cash and be unable to pay fixed costs. Being able to understand your “Statement of Cash Flows is critical for these situations and even a deciding factor if your business survives,” says Seller Accountant.
The e-commerce business is highly competitive and being able to get an edge over the competition can increase your cash flow. For example, knowing when people are most customers are going to be buying your product can allow a business to better understand where they may need to buy more inventory.
This is where Plastiq can help. Putting your inventory expenses on your existing credit card can help you keep your cash on hand so you can go after other hot opportunities.
Paying closer attention to your Statement of Cash Flows is essential for new or long-tenured businesses. “From mishandling expenses to not having enough inventory, every successful entrepreneur has failed at some point in their life,” says Seller Accountant. Trial and error is needed to find the right balance between cash and inventory.
Check out how Plastiq can be the perfect partner to help your e-commerce business better manage cash flow and inventory needs. Go to plastiq.com or reach out to email@example.com for personalized help.