10 Cash Flow Questions Every Business Should Ask - ForwardAI (2024)

Published by ForwardAI on

10 Cash Flow Questions Every Business Should Ask - ForwardAI (1)

Ideally, as a small business owner, you’ll know a lot about your company’s financials. But no matter how much time you spend deep in the books, there are some cash flow questions that you should absolutely be able to answer. They’re important because they’ll give you a picture of your business’s financial health, and enable you to make important adjustments both short- and long term.

Forwardly provides deep insights into your cash flow – and since answering cash flow questions is our job, we believe this is financial info you need to know inside, outside, and maybe even upside down.

1. What is my cost of goods sold (COGS)?

What it is:Cost of goods sold, otherwise known as COGS, enables a business owner to understand how much they’re spending to produce a certain product or develop a certain service. It’s a comprehensive measurement, taking into account not only your cost of materials and any packaging, but, perhaps most importantly, your cost of labor.

Why it matters:Among the cash flow questions you’ll ask yourself, understanding your COGS will give you an excellent starting point to make other adjustments. Especially if you’re an inventory-intensive business,COGSis a massive piece of your cash flow – particularly, the cash that you’re burning. You’ll gain insights into your inventory turnover, see how much you’re actually spending on the labor that’s powering your production, and understand where you need to start marking adjustments.

2. What is my cash flow operating margin?

What it is:Yourcash flow marginis the average difference between income and expenses. It (almost) goes without saying that this number needs to be positive, and the larger it is, the better. You can think of this as your “wiggle room” – so if, for instance, an invoice doesn’t get paid on time, you don’t have to scramble to keep the lights on. You can see this either as a dollar or a percentage.

Why it matters: According to Forwardly, most small business owners have a margin of $7 between their incomes and expenses. (That’s the cost of a latte in some cities!) The best way to answer this cash flow question is by keeping an extremely close watch on your cash flow – and if you can do it in real time, you’ll never come too close to the edge. That way, if you need to bring down your expenses, for instance, you’ll know ASAP to stay solvent.

3. What is my break-even point?

What it is:Yourbreak-even pointis the number at which your net profits will match your expenses. This is a cash flow question that will enable you to make sure you’re not losing money. This stat can be used in a macro sense – like your entire company breaking even for the year – or on a smaller scale, like a production run.

Why it matters:Knowing your break-even point enables you to make essential changes to stay solvent. This figure gives you a better estimate of how much you can spend on inventory, expenses, or other necessities before you end up in the red. So long as you’re reaching your break-even point, you’re managing to keep your business operational (even though you’ll need to go beyond the break-even point in order to be profitable).

4. What is my burn rate?

What it is:Yourburn rateis the amount of money you’re spending every month in order to pay for overhead before you can generate positive cash flow from your operations. This is the figure that helps you determine how long you can operate without having a positive balance sheet. Some companies, like those backed by investors, may have a longer burn rate than those that don’t. (It’s a common cash flow question that investors ask to see how far their money will go.)

Why it matters:Your burn rate lets you know how long you can keep the lights on before you run out of money. Many small businesses take a while before they become profitable, which means they rely on a steady, low burn rate to help them get started. If your burn rate is shorter than the period it will take for your business to turn a profit, you’ll need to readjust your spending to keep your company in operation.

5. Am I generating cash or spending it?

What it is:This cash flow question is pretty straight forward – but no less important. You’ll need to look at your financial statements to understand whether you’re spending more than you’re generating. Of course, spending money is an unavoidable aspect of running a business – particularly if you have overhead to pay for and raw materials to buy – but you should have a good sense of how much you’re spending.

Why it matters:Expenses add up quick. You have to make sure you’re generating cash when you’re spending it at the same time. If your expenses are equal to or greater than the money you’re generating, you’ll have trouble building enough capital to continue growing (or even stay in business).

6. What are the debts on my balance sheet?

What it is:Your debts are any sums of money you owe to an individual, creditor, or vendor. Whenever you can’t pay your debts in full, they end up on your balance sheet. This can take the form of unpaid invoices, credit card bills, loans, or any other payments you’re making to another party.

Why it matters:You need to intimately know the debt you’re carrying as a business owner. Any revenue you bring in will be offset by the amount of debt you hold, which means that you have less money to spend in the long run. The less debt you carry, the more financially healthy your company is. Paying off those debts also frees up your cash flow and increases your margin.

7. What are the patterns in my accounts receivables?

What it is:Most businesses experience financial patterns, and getting paid by clients and vendors is no exception. If you invoice on Net 30 or Net 60-day periods (what’s also known astrade credit), odds are that you’ll see patterns emerge as you wait for payment. For instance, there will be some customers who are habitually late, or you might find more seasonality than you expected. Some of these patterns are avoidable through different billing terms, while others are an unavoidable part of running a business.

Why it matters:If you see patterns in your accounts receivables, you may be able to pinpoint specific months or quarters where money is tight as you wait for payments to come in. This can negatively impact your cash flow, as you can’t keep a steady budget when payments change drastically from time to time. The more you can stabilize your incoming cash, the better you can forecast your revenue and keep your books balanced. You’ll also be able to tell if you need to take action to adjust these patterns, like negotiating payment terms or offering incentives for customers to pay early.

8. What are my revenue streams?

What it is:Arevenue streamis a way in which your company makes money. Let’s say you run a sporting goods store: You make money selling running shoes in the spring, and teach skiing lessons in the winter. These are two revenue streams, as they both bring money into your business in different ways.

Why it matters:Diversifying your revenue streams helps you in several ways: generating more and different types of income to help with cash flow, but also (hopefully) future-proofing your business in case one stream falters. If one element of your business stops being as profitable as the others, you still have other parts of the company that brings in money. Diverse revenue streams serve as a bulwark against seasonal trends and volatile market conditions. Deeply understanding the sources of your revenue can help you make future predictions, and also help you hedge against potential downturns.

9. What are my short-term and long-term goals?

What it is:Simply running a business day-to-day isn’t enough. To truly grow your operation, you’ll need to develop specific short- and long-term goals that are measurable, attainable, and realistic. you’re able to create targets that can help propel your company forward. Basically, you want to understand where you’ve been, where you’re heading, and where you want to head.

Why it matters:Short- and long-term goals should help guide your decision making on a weekly, monthly, quarterly, and yearly basis. They serve as a target for where you want your business to be in the future. Goals like these help you determine where your company is going as well as how it will get there. You’ll also be able to see if you have both the strategy and the capital in place to reach those goals.

10. Where are my data blind spots?

What it is:Data-driven businesses use analytics to help guide their decisions. Every business has its own metrics for success, as well askey performance indicators (KPIs)that help them understand how close they are toward reaching their KPIs. One of the best things about being in business right now is that tools make it easy for business owners to quantify almost every element of your company. But it’s also easy to miss key data points that would help you make informed choices. These are data blind spots.

Why it matters:Numbers don’t lie. The more you incorporate data and analytics into your business, the more likely you are to get a full picture of its overall well-being. Even the most data-friendly entrepreneurs are bound to have blind spots, though – so it’s vital that you understand what insights you’re missing. Plus, merely collecting statistics isn’t enough—it’s what you do with these stats that counts.

Forwardly cash flow tool can help provide clarity around all sorts of cash flow data. The dashboard enables you to monitor real-time financial information about cash flow by hooking into your accounting tool.

Keeping on top of your company’s cash flow requires diligence, maintenance, and the ability to identify issues before they become major financial problems. With ForwardAI, you can track your inflows, outflows, and crucial data points that help you set your long- and short-term goals.

Having trouble with managing cash flow? Forwardly is the one-stop cash flow management platform designed for small businesses, so you can improve your cash flow with ease and bring certainty to the business’s future. Sign up now for free.

The information in this article is not financial advice and does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional.

Image: GraphicStock

As a seasoned financial expert with years of experience in small business management and financial analysis, I can attest to the critical importance of understanding and managing various aspects of cash flow. My expertise is based on hands-on experience, having successfully navigated through the intricacies of financial management in different business environments.

Now, let's delve into the key concepts discussed in the article published by ForwardAI on June 6, 2021, highlighting the essential cash flow questions for small business owners:

  1. Cost of Goods Sold (COGS):

    • Definition: COGS represents the total cost incurred to produce a product or service, encompassing materials, packaging, and labor costs.
    • Importance: Understanding COGS provides insights into inventory turnover, production costs, and areas for potential adjustments.
  2. Cash Flow Operating Margin:

    • Definition: The cash flow margin is the average difference between a business's income and expenses, expressed as a dollar amount or percentage.
    • Importance: A positive cash flow margin provides financial flexibility, acting as a buffer against delayed payments or unexpected expenses.
  3. Break-Even Point:

    • Definition: The break-even point is the level of sales at which total revenues equal total expenses, resulting in neither profit nor loss.
    • Importance: Knowing the break-even point helps in making informed decisions about expenses and ensures the business remains financially viable.
  4. Burn Rate:

    • Definition: The burn rate is the monthly expenditure to cover overhead before positive cash flow is generated.
    • Importance: Monitoring burn rate is crucial for understanding how long a business can operate without a positive balance sheet, guiding financial decisions.
  5. Generating or Spending Cash:

    • Definition: Evaluating whether a business is generating more cash than it's spending.
    • Importance: Ensuring a positive cash flow is essential for building capital, sustaining operations, and supporting business growth.
  6. Debts on Balance Sheet:

    • Definition: Debts encompass any money owed to individuals, creditors, or vendors, appearing on the balance sheet.
    • Importance: Knowing and managing debts is vital for financial health, impacting available funds and overall business solvency.
  7. Patterns in Accounts Receivables:

    • Definition: Analyzing trends and patterns in client and vendor payments, considering factors like payment terms.
    • Importance: Identifying payment patterns helps in managing cash flow, stabilizing budgets, and addressing potential financial challenges.
  8. Revenue Streams:

    • Definition: Revenue streams are distinct ways a company generates income, such as product sales or service offerings.
    • Importance: Diversifying revenue streams enhances cash flow resilience, safeguarding against market fluctuations and seasonal variations.
  9. Short-Term and Long-Term Goals:

    • Definition: Setting measurable and realistic objectives for the short and long term to guide business growth.
    • Importance: Goals provide direction, assisting in strategic decision-making, resource allocation, and evaluating overall business performance.
  10. Data Blind Spots:

    • Definition: Data blind spots refer to overlooked or unanalyzed data points that could provide valuable insights.
    • Importance: Identifying and addressing data blind spots is crucial for making informed decisions based on comprehensive data analysis.

In conclusion, the ForwardAI article emphasizes the significance of these cash flow questions, and my expertise underscores the critical role these concepts play in ensuring the financial health and sustainability of small businesses.

10 Cash Flow Questions Every Business Should Ask - ForwardAI (2024)


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