Lv.9 Managing Business Funds / Methods for Cash Management and Cash Flow [Money & Financial Accounting] | Small Business Studies

If your 'HP' (cash) runs out, it's game over! 'Cash management protects your business'

The 'yardstick' for measuring 'business vitality' is not 'sales,' but 'cash.'
This is because no matter how much your sales grow, if you don't have cash on hand, you cannot make payments, investments, or even buy supplies for today.
In gaming terms, if your 'HP (Hit Points)' hits zero, it's 'instant game over'—in the same way, the moment your cash runs out, your small business is forced to shut down.
For example, payment from a customer is due in one month, but this weekend you have rent and payroll to pay. Controlling this time lag is what 'cash management' is, and if this breaks down, even the best business will collapse. This can be said to be the typical cause of bankruptcy despite being profitable.

The battle against 'cash flow,' a formidable enemy that wears down businesses and owners

Among cash management, what you should be especially conscious of is 'cash flow.'
It is not just about 'how much do I have on hand now?', but the technique of deciphering 'when, from where, and how much comes in, and when, to where, and how much goes out?'
Even if you have sales, if it takes time to receive payment, you cannot use that money. Conversely, in most cases, purchases and payments come due in advance. 'Predicting and adjusting' this gap is the key to cash flow. In other words, cash flow is 'solving a puzzle of time and money.' If you misassemble this puzzle, your funds will suddenly run out, which means the collapse of your small business.
You were happy thinking, 'I made sales! I made a profit!' but then the next month 'taxes and social insurance premiums' payments are concentrated and you run out of funds...
To prevent such a situation, it is essential to look not at 'book profit,' but at the 'movement of cash on hand.'

'Hey, Finan. Is cash flow really that scary...? Isn't it fine as long as I have sales?'

'If you only look at sales, you'll fall into a trap. The important thing is the timing of money—when it comes in and when it goes out. If you misread that, you'll suddenly run out of cash.'

For a small business owner, cash flow involves more pressure than you might imagine. 'Can I pay this month?', 'Will there be any left next month?', 'What will happen the month after?' These questions run through your head almost every day.
Even if you have sales, it's meaningless if payment comes later. Even if you have profit, you will collapse if you don't have cash. This 'contradiction' is the point that drains an owner's spirit the most.
Cash flow is like continuing to fight an invisible enemy.
There is no clear 'answer,' nor is there an 'end.' 'Foreseeing,' 'organizing,' and 'making predictions' are your only weapons.
Cash flow is a problem of numbers, but at the same time, it is a problem of the mind. That is why it needs to be supported as a 'habit,' not a system. 'Organizing numbers so you don't drain your spirit'—that is the greatest significance of cash management.

The most practical tool to prevent the deterioration of cash flow is a 'cash flow statement'. A cash flow statement is a simple table that lists future income and expenditures, visualizing in advance 'on what date, how much will come in, and how much will go out?'.
While many companies create income statements every month, not many companies finish a cash flow statement properly every month—this reality is one of the factors leading to a high business closure rate.
Excel or a handwritten notebook is enough. The important thing is the act of 'foreseeing' itself. For example, just listing out rent and payments for the next three months makes the outline of reality much clearer. And if you have a forecast, you can take action. If you can take action, you will feel more at ease.
The 'criteria for judgment' for that are packed into the cash flow statement. It is truly like a weather forecast. If it's sunny, you go out. If it's raining, you take an umbrella. Whether or not you have this 'preparation' makes a huge difference in the level of management fatigue.

'I'm not good with numbers, but... is it really better to make a cash flow statement?'

'Of course! It can be simple, but just writing down what you know is taking a step toward safety.'

For small businesses, cash management is a lifeline

Unlike large corporations, small businesses have limited 'borrowing capacity and financing options,' so 'how you move the money on hand' is directly linked to daily management decisions.

✓ Can you notice the signs of funds thinning out?
✓ Are you managing the 'income and expenditure schedule' better than 'sales'?
✓ How will you smooth out the waves of income?

Relying only on intuition for these things, and instead 'visualizing' them and manipulating them strategically, is cash management in the true sense.
Cash management is the technique of deciphering the 'flow of money' and predicting future cash balances.Conversely, as long as your HP—cash—lasts, you can rebuild your business as many times as needed. In that sense, 'protecting cash = vitality' is the most important skill for an owner.

Understanding the rules of cash flow and keeping business money moving smoothly [The Essence of Financial Statements and the Three Financial Documents] 3 Points

1) The true identity of 'I have profit but no money...' is the gap between the P/L and C/F

'I should have made a profit, but for some reason, there is no money left.'
Encountering such a sense of discomfort is actually common for small business owners. The cause lies in the 'gap' between the Profit and Loss Statement (P/L) and the 'cash flow statement' or Cash Flow (C/F) statement.
The P/L records 'earnings' and the C/F records 'cash movements' under different rules. For example, if an account receivable is generated, it is immediately recorded as sales on the P/L, but the actual money has not yet been received.
Payment is later, but it looks like there is profit on the P/L—this is the basic true identity of 'having profit but no money.'

'Hey, Finan. Is it possible that I'm happy about making a profit, but for some reason, the account is empty?'

'That's right. It's because the rules for 'profit and money' are different. It's better to think of the P/L and C/F as separate games.'

From the perspective of cash flow management, managing the timing of 'when money comes in and when it goes out' is more critical than 'how much you have right now.' Changing how you view numbers will change your future choices.
The P&L tells you 'whether you are profitable.' However, the CF shows you 'whether you can survive.'
In other words, profit indicates the degree of goal achievement, while cash confronts you with the reality of your current position. What is needed for management decisions is not just future dreams, but the calmness to accurately see 'where you stand right now.'

The point to note here is that the tax-based cash flow statement and the realistic 'cash flow table' needed for daily management have slightly different characteristics.
The cash flow statement organizes the movement of funds into three categories—operating, investing, and financing activities—according to accounting rules, and is mainly used as part of financial statements for 'financial analysis.'
On the other hand, the cash flow table is a practical management tool that looks at the daily, realistic movement of cash, asking 'when and how much money will be received, and when and how much will be paid?' This can be called a 'living ledger' for protecting cash balances and making management decisions.

Understanding the profit structure leads to the ability to read the 'flow of money'

Also, by 'understanding the profit structure,' you can grasp where and how much expenditure is occurring, creating a foundation for taking appropriate measures.
Even though we say 'profit' in one word, it is not just one thing. In the actual Profit and Loss Statement (P&L), profit is displayed in five main stages, each with different meanings and contents.

1. Gross Profit: The 'profit at the production stage,' calculated by subtracting the cost of goods sold from the amount earned by selling products or services

2. Operating Profit: The 'profit earned from core business,' calculated by subtracting selling, general, and administrative expenses from core business sales

3. Ordinary Profit: The 'profit from overall normal business activities,' including financial income and expenses in addition to core business

4. Profit Before Income Taxes: The 'profit specific to that period,' which also takes into account sudden gains or losses (such as disasters or asset sales)

5. Net Income: The 'true profit remaining for the company,' after finally deducting corporate taxes and similar items

Many small business owners often confuse this with the misconception that 'high gross profit means being profitable.'
However, in reality, selling, general, and administrative expenses such as labor costs and rent, as well as loan interest and taxes, are subtracted from that, so the 'profit remaining on hand' is much smaller.
That is why correctly understanding the profit structure is an essential literacy for knowing 'where you are really earning money right now, and where money is going out'.
By grasping the structure of these five profits, the speed and accuracy of management decisions will improve significantly. Rather than just chasing numbers, the ability to understand 'how profit decreases' through its structure—if you acquire this, managing cash flow for a small business will become much easier.

2) The cumulative performance of earnings is the BS—Key points of cash flow revealed by the 'Balance Sheet'

The Balance Sheet (BS) that appears in financial statements is the 'balance sheet of your business.' In other words, it represents the accumulated score of your management efforts to date.

If the P&L is your 'seasonal performance,' the B/S is your 'career-long performance.'
Cash, accounts receivable, loans, inventory, assets, liabilities, and more—the 'big picture' of your business is projected here. What you should focus on here, rather than just 'the money you have now,' is:
✓ How much cash endurance do you have against fixed costs?
✓ Is money 'sleeping' in accounts receivable or inventory?
✓ Is the loan repayment schedule realistic?

It is about knowing the dangers of that structure. The B/S is a map for discovering 'cash flow landmines.' Once you can read it, the number of proactive steps you can take will increase significantly.
And above all, the B/S is also a mirror that reflects your 'way of life in management.'
The value you have accumulated in the past, the risks you are carrying, and where you have allocated your resources—all of that is honestly etched into the B/S. That is precisely why the act of reading a B/S is also 'facing your own management head-on.'

'I don't really get the B/S, can't I just deal with it later?'

'That's the same as skipping a health checkup when you're feeling unwell. In terms of knowing the limits of your physical strength, the B/S is truly your "management health checkup report."'

3) For small business management, knowing how to use the 'three major financial statements' is more effective than a perfect financial statement.

There is no need to 'perfectly read' financial statements. What is more important is the ability to see the Profit and Loss Statement (P&L), Balance Sheet (B/S), and Cash Flow Statement (CF) as a whole and understand how they connect.
✓ For example...

• P&L: Check if you are making a profit

• CF: See if that profit has actually come in as cash

• B/S: Confirm how assets and liabilities are accumulating

In this way, 'combining the three to use as material for management decisions' is more important than anything else in small business management. Rather than reading each one perfectly, first grasping the relationship between the three statements intuitively will become your greatest weapon.
Even those who say 'I'm not good with numbers...' will find that just by being conscious of the overall connections, the way they see their business will change dramatically. It doesn't have to be perfect. First, try recording your own 'three-statement memo' based on your own knowledge.
✓ For example...

• P&L (Profit and Loss Statement) Memo:
  → 'This month, sales were 500,000 yen, purchases were 200,000 yen, and personnel and rent costs were 250,000 yen. Therefore, the profit is 50,000 yen.'

• CF (Cash Flow) Memo:
  → 'Sales are paid at the end of the month, so I don't have them on hand yet. Rent and purchases are already paid. The cash balance is 50,000 yen.'

• BS (Balance Sheet) Memo:
  → "Current assets are 50,000 yen in cash and 100,000 yen in inventory. Since there are 500,000 yen in borrowings, liabilities exceed assets."

By simply writing down in your own way 'how much profit you are making,' 'how much you have on hand right now,' and 'where money is tied up', you will naturally be able to map out your business in your mind.
Numbers are not something to be feared, but tools to protect you. Once you grasp that feeling, your relationship with numbers will change, and confidence in your management will begin to sprout.

The 'ability to read and interpret' financial statements clarifies your management perspective.

Even in small businesses, the ability to read and interpret financial statements is essential. These three financial statements are basic tools for grasping the health of your business. Furthermore, I will introduce concrete methods not just for looking at them, but for 'analyzing' them.
For example, the following 'four analytical perspectives' are often used in loan screenings by financial institutions and are frameworks useful for actual business decisions.

1. Profitability Analysis (Ability to generate profit)
This analysis determines how efficiently a company is generating profit. A representative indicator is 'ROE (Return on Equity),' which shows how much net profit was produced relative to the capital invested by shareholders or management.

2. Safety Analysis (Solvency)
This analysis measures whether you can make daily payments, in other words, whether you are a 'company that won't collapse.' Through indicators like the current ratio, you can confirm the stability of your short-term cash flow.

3. Productivity Analysis (Efficiency of resources)
This is an indicator showing how efficiently human resources and assets are generating value. For example, 'labor productivity' measures the added value per employee and provides hints for human resource utilization.

4. Growth Analysis (Performance growth)
This analysis determines how much a company is 'growing' or 'being evaluated by the market' through changes in sales and other factors. It is also indispensable for measuring future potential.

These perspectives serve as a 'map' to turn the numbers in your financial statements and accounting software into management hints rather than just 'records.'
✓ Which indicators are signs that need improvement?
✓ Where are your strengths and where are your weaknesses?
✓ How are you viewed by lenders and investors?

By becoming able to perform such analyses, your management decisions will become more precise, and you will be equipped with the power to open up the future.

Three Steps

If there is a clog in the flow of money, it becomes difficult to continue even the best business.
It is important to be a 'manager who understands the movement of funds,' not just a 'manager who is good with numbers.' Here, I will introduce three steps to smooth out cash flow and utilize financial statements for daily decision-making.

① Introduce suitable accounting software (app)

For those who say, 'I'm not good with numbers...', I highly recommend making accounting software (apps) your ally.
We are now in an era where, even without bookkeeping knowledge, cloud-based accounting apps can handle journal entries, ledgers, payroll calculations, and profit automation at a high level.
For example, just by entering sales, expenditures, and expenses, 'grasping profit and loss, monthly trial balances, and creating financial statements' can be completed 'automatically.' This is what becomes possible.

✓ For those who are 'anxious and find tax returns troublesome...'
✓ For those who 'don't have a reliable tax accountant and want to manage the numbers themselves'

If you receive the benefits of this accounting app, 'visualization of numbers' will progress dramatically.
In the first place, financial statements are a manager's report card. They are official management documents that show 'this is the state of our company' not only to the competent tax office but also to banks, business partners, employees, and family. And the profit margins, asset status, and indicators of safety and growth
contained therein become the material for judging your next move. Current accounting software comes standard with linkage functions with bank accounts, credit cards, and electronic money, which automatically import daily deposits and withdrawals and reflect them in real-time.

'Can you really create financial statements and file tax returns with accounting apps now?'

'Yes. There's not much need to hire accounting staff or go out of your way to request a tax accountant.'

An era where accounting tasks can be fully automated—

You no longer need to worry about the hassle of manual entry or calculation errors. Cloud-based accounting software, such as freee, Money Forward Cloud, and Yayoi Online, is particularly well-suited for small businesses.
Each has its own features, and they differ in price and functionality. Choose the best tool according to your business style and IT literacy.
I have summarized the features, pros, and cons of these three accounting software programs, so please take a look.
As the first step toward "the numbers you see becoming your confidence," adopting accounting software will surely become a weapon that reliably boosts your cash flow management skills.

② The Order of Cash Movement—Understanding the Reality of Payments through the "Four Axes of Company & Family, Income & Expenditure, and Taxes"

The realistic movement of funds in a small business is not completed solely within the "company."
In reality, "Living (Household)," "Business Expenses," and "Tax Payments"—everything is intricately intertwined. Therefore, I recommend classifying the flow of funds using the "Four-Axis Framework." You will be able to see at a glance "where money is decreasing" and "when payments are concentrated." Furthermore, you will be able to see the
overall structure of the money flow, such as how expenses are connected.

Especially in small-scale management, where the business and the owner's life are closely related, I strongly recommend checking with this "Four-Axis Framework."

"Finan! Somehow, even now, my work money and living expenses are all mixed up..."

"Most people have that feeling. That's why if you divide them into four axes, the flow becomes clear."

③ Creating a "Cash Calendar"

For those who feel that being told to "create a cash flow statement" is honestly a high hurdle, this is a habit I want you to try: the habit of creating a "Cash Calendar."
✓ The method is simple.
1 Prepare a calendar app or planner

2 Record monthly expenditure and planned deposits (for example...)

• 10th: Credit card withdrawal

• 15th: Personnel expense payment

• 27th: Rent payment

• 30th: Sales deposit (XX Bank)

3 Note the projected balance
Visualize the future flow of money by thinking, "Since X amount comes in on this day and Y amount goes out... the balance for this week will be about this much."
This "habit of visualization" is the ultimate tool to prevent cash shortages.

A cash calendar can be a spreadsheet or handwritten. By cultivating the sense of predicting the "future balance," you will gain flexibility in making decisions about borrowing, spending, and investing, and as a result, the manager's peace of mind will surely follow.

Cash Management Habits to Prevent Cash Shortages—Visualizing the Flow of Money

Going bankrupt because you have no money—that is spoken of as a matter of course in the business world.
Then, what exactly is the true nature of that "no money"?
In management, the flow of money is compared to "blood circulation." If the money going out is faster, larger, unplanned, and more than expected, life will end no matter how much profit is being made—that is a cash shortage.
What many small businesses struggling with cash flow have in common is that they "could not see it." In other words, there was not enough "visualization" of the money flow.

The flow of money is a battle of "speed" and "timing"

What is important in cash flow management is not the absolute amount of "income" and "expenditure." When does it come in, and when does it go out? This time lag can be fatal becomes. For example, even if you are scheduled to receive 1 million yen at the end of the month, if you have a payment of 1.2 million yen before that, you are out. This discrepancy is the "formidable enemy" for a small business. To stand up to this formidable enemy, what is needed is not flashy accounting knowledge or numerical skills, but

the accumulation of small daily habits.

"Check the movement of money once a day"—from "looking at" to "reading" your bankbook

There are many people who have the habit of checking their bank accounts. Of course, that is important, but just looking at the balance is not very effective. What is more important is to read the flow of deposits and withdrawals from the increase or decrease in the balance, and check every day, "Why is this amount today?" This habit is the key to cultivating a sense of cash flow management. Just as you write down appointments such as deliveries and meetings in your calendar or scheduler,
put the inflow and outflow of money into your schedule as well. For example, initiatives like entering a "cash calendar" are important. Monthly fixed payments for rent, personnel costs, taxes, purchases, and loans. Invoices scheduled for payment, subsidies, and the maturity of repayment deferrals. These,
break these down into actual dates and grasp them on a "time axis". By organizing the flow of cash in that way, you will be able to make concrete forecasts
such as "this month is tough" to "it is dangerous from the Xth to the Yth."

Visualize cash flow with "visualization graphs" and cultivate your intuition with colors, shapes, and lines

Not just words and numbers, the flow of funds felt visually brings great effects to decision-making. Using Excel or app cash flow tools, graph your monthly income and expenditure. Color-coded line or bar graphs will immediately tell you "where is dangerous now" and "what is different between last month and this month." Especially for business owners who feel uncomfortable with management,
"from judging by numbers" to "feeling by color." That shift in perspective will fundamentally train your sense of funds.

"Viewing large expenditures by dividing them" is also a very effective method. Annual payments and lump sums should be captured as monthly amounts.
For example, for things with large one-time expenses like insurance premiums or capital investment, it is easy to dismiss it as "that month was tough," but by averaging it out over the year and managing it as a "cost per month", stable cash flow management becomes possible. If you compare it to a household budget sense, it is the same idea as
reflecting all annual fixed property taxes, insurance, and vehicle inspections in your household account book by "dividing them by month".

"Cash flow management ability" is created by habits

When the flow of money is visualized, your mental anxiety will definitely decrease. Nothing drives a business owner harder than "not being able to see." Conversely, the state of "if I can see this much, I am at ease" creates steady, high-quality decisions.
A shortage of funds, or HP, means "game over." However, the small daily habit of "visualizing cash flow" will turn the game of business into a sustainable adventure. It takes effort, but it is no exaggeration to say that "funds" are your life. If your body is unwell, you try to sense "where is wrong?" Just like that health management, if managing funds carefully and efficiently extends the life of your business, there is no doubt that it is a
"great bargain."

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