Everything You Always Wanted To Know About Cash Flow Statements But Were Afraid To Ask

Editor’s Note: This is one of an eight-part series about key financial terms all entrepreneurs should know. 

Never heard the term “Cash Flow Statement”? The good news is that it’s almost exactly what it sounds like! And, by the end of this article, even a financial-terms-novice can feel comfortable reviewing and discussing a cash flow statement with his or her CPA or CFO.

Feeling comfortable with a cash flow statement is imperative, because these reports are critically important to your business. In fact, CPA and entrepreneur, Bradley Klingsporn, founder of Green Bay’s Aardvark Wine Lounge, says “Many small business owners and small business accountants believe that the cash flow statement is more important than an income statement.” That’s because, “[if] the business is making huge profits, but doesn’t have anything in the bank, it won’t be able to pay its bills and it could still go under. Keeping a close eye on the cash balance is as, if not more, important than keeping an eye on the bottom line.”

What exactly is a cash flow statement?

A cash flow statement is a financial report that shows the amount of cash and cash equivalents used by a company in a given period. Cash flow statements contain three main categories. The three categories are cash flow from:

  1. operating activities
  2. investing activities
  3. financing activities.

Taken together, these three groups account for all cash coming into and going out of a business.

Why are cash flow statements important?

Staying on top of cash balance is critical to the health of a business.  This is of particular importance if you’re a business who is likely to raise money at some point. And knowing your “runway” — or how long you’re able to operate with the cash you have on-hand at the moment — is key.

When reviewing cash flow statements, entrepreneurs should be asking if the cash flows are sustainable. “If cash decreased in the period, was this because of a change that period? For example a capital purchase or large debt payment.  Or is this going to persist? For example, regular loan payments)?” Klingsporn asks. “If cash decreases are expected, is there a need for additional cash inflows? If so, how will the business get the additional cash?”

How can cash flow statements impact your financing options?

Cash flow statements allow potential financing partners to assess a company’s general health, including how quickly your company will be able to pay off outstanding debts. Although it’s not imperative to have a high cash flow to borrow money, lenders may favor companies that do. The more positive a cash flow statement looks, the easier time you likely to have securing favorable financing options.

Can I create my cash flow statement?

If you’re in the early stages of looking to raise capital and have never put together or reviewed a cash flow statement, Klingsporn’s advice is to bring in an expert. “Hire an accountant,” he says. “If you don’t want to do that, the basic process is to identify cash inflows and outflows that don’t affect net income and expenses and income that doesn’t affect cash. The former would include principal loan payments, cash from new debt, and purchases or sales of capital equipment. The latter would include depreciation and changes in receivables or payables. If that sounds confusing, see the first sentence.”

What’s next?

Just like it’s easier to travel in a foreign country when you know the language, it’s easier to raise capital (or secure any kind of funding for your business) when you’re familiar with key financial terms and their real-life applications.  Check out the other installments in this series covering The next installment of this series, where you will learn everything you wanted to know about turnover ratiodebt to income ratiopayables turnover ratiodebt service coverage ratio and current ratio


Why Isn’t My Email Marketing Working?

You’ve made email marketing a key part of your marketing strategy. You’ve carefully compiled your email list, created some beautiful email designs, and wrote some amazing copy….

So why aren’t isn’t your email marketing getting a response?

There is no one definitive explanation of why an email marketing campaign doesn’t perform.  But, there are best practices you can implement to help improve your results.

Segment your email lists.

Personalized content is key to a successful marketing emails. Email segmentation essentially means separating the people on your email list into small groups, based on some type of commonality. Whether you distinguish your segments by the types of things they purchase, how recently they’ve made a purchase,or the discounts they’ve redeemed, segmentation allows you to tailor your messages based on the recipient, and what they’ll likely notice.

While segmenting your lists takes a little more effort than a generic email sent to all ,analysis by MailChimp indicates that it’s time well spent. Opens and clicks on segmented email lists are 100% higher than they are with a non-segmented list. Once you do segment, the content of your email should be tailored to the specific group, along with the subject line. (More on that later).

Schedule emails to suit your audience.

You can’t change the fact that the recipients on your email list probably have a cluttered email inbox, but you can increase the chances that your email will get noticed by sending it when you have a captive audience.

One study by MailChimp revealed that emails sent on a Thursday generally receive the highest amount of opens, followed closely by those sent on a Tuesday. Unless your email content is related to a hobby or a recreational activity, avoid sending emails on the weekend.If your email list is made up of consumers (not a business-to-business communication) send your email early in the morning, before traditional office hours begin. Your recipients are most likely to be commuting into the office, or actively checking their email before their day is in full swing.

Avoid email fatigue

In the same way that you want to schedule email sends around the time of day and week that fits best for your audience, you also want to make sure that the frequency in which you send these emails fits your audience. As you start to track your engagement metrics (see more below), you can determine how often your audience wants to be contacted. And many email platforms allow you to set up a preference center, which gives you the ability to let your audience actually tell you how frequently they would like to be contacted by you.

Why is frequency so important? If you don’t email often enough, your brand will not stay top-of-mind with your audience. On the other end, if you email too often your audience could begin to experience email fatigue.  In short, email fatigue is when your audience gets. tired. of. getting. so. many. emails. from. you.  They will stop opening them and engaging with them. If this happens too often, some email clients will begin to automatically direct these emails to clutter or spam folders.

Experiment with subject lines.

An email subject line is your first chance to make a first (or potentially, last) impression. While the “right” subject line depends on the content in your email, the audience and your relationship with the recipient, there are a few tricks of the trade you can apply:

Subject lines should lead with actionable language and a clear payoff for the recipient. Eliminate unnecessary nouns and pronouns.  Use words like “save,” “learn,” “take,” or “see” to get right to the point.Personalize subject lines to indicate that you know the recipient. Is the recipient on your email list because she purchased a similar item in the past? Perhaps she redeemed a similar promotional offer once before, or left an item in a shopping cart. Tell her why she’s got to open your email.

Appeal to your readers.

There is one thing your reader wants to know in your email: “What’s in it for me?” Your email copy should address that question within the first few lines of copy, and include a clear call to action. If you make them scroll, they probably won’t find it.

Test how your email displays.

At least half of all emails are now opened on a mobile device, according to Hubspot. Perhaps more importantly, mobile users check mails three times more frequently than desktop users. Ensure that your emails can be opened and read on a mobile device and a traditional computer screen, and that the appearance and functionality appearance works in all email clients including Apple iPhone, Gmail, Apple iPad, Android, Apple Mail and Outlook.

Use metrics to refine your marketing.

Email campaign metrics can tell you a lot about your customers and business opportunity.  Some of the top metrics include how many people opened your message (your open rate), read your emails, clicked on the links (your click through rate) and who unsubscribed from your list entirely after receiving a specific email.

Establish a cadence for when you’ll run campaign reports. Then establish and test against benchmarks so you have a foundation from which to build. Apply your findings to test variables like subject lines, creative messages, the landing pages you use and the time you send the email.  Then refine continually. Eventually, patterns will emerge and you’ll start to know how to optimize email as a channel that helps drive results.

Always remember that your customers come first

Just like they do in every other aspect of your business, your customers need to come first with email marketing. Never send emails just to send emails. Members of your audience gave you their email address with the understanding that you would provide something of value. Share a great discount. Share an educational blog post. Establish a weekly or monthly email newsletter that focuses on topics that are important to them. Just be sure to stay true to that unspoken agreement.  And always send something that will that will also strengthen your relationship with your audience.

Email marketing can be an exceptionally useful tool in your marketing strategy – if you do it right! By integrating these useful tips into your email marketing program, you should begin to see better results. Any by continuously watching your metrics and A/B testing your email content, those results should continue to improve.


Boost Your Revenue and Profits with Psychological Pricing Strategies

The Idea of Psychological Pricing Strategies: Business owners and executives have a love-fear relationship with raising prices: They’d often love to raise prices, yet fear customers will choose to go to a competitor.

A combination of sharply increased optimism on the part of business owners and a continued increase in operating expenses – particularly labor – has resulted in a wave of price hikes by small business owners, according to the National Federation of Independent Businesses.

While pricing increases may be a tactical tool to react to financial pressures, concerns about potentially losing customers aren’t fanciful. Sometimes the trade-off may be worth it, as when Netflix raised prices by 60 percent and lost only 4 percent of customers. However, when you lose too much business, those price increases may not be such a good idea.

Psychological pricing strategies are ways to nudge people towards spending more without scaring them off. Here are four techniques you can use to potentially help you avoid negative customer reactions.

Implementing Psychological Pricing Strategies

1. Use the pennies-a-day technique

You’ve undoubtedly seen the pennies-a-day pricing strategy. Marketers break the cost down from a single expense into a series of smaller ones, even though customers may still make the aggregate payment. According to the Journal of Consumer Research‘s “Pennies-a-Day: The Effect of Temporal Reframing on Transactional Evaluation,” the approach succeeds through consumer perception. Even though both the full pricing and break-down both appear, the pennies-a-day pricing causes consumers to focus on small, ongoing expenses rather than the single larger one. The difference between the two may, “significantly influence subsequent transaction evaluation and compliance,” as the study notes. That’s research-speak for customers being more likely to buy.

2. Offer the right framing

Long before winning the Nobel Prize, economist Richard Thayer ran an experiment in which he told lab subjects to imagine they were sitting on the beach during hot weather. Thayer then asked how much they’d pay for a beer if another person would get it for them. The subjects were willing to pay more if the beer provider was an expensive hotel rather than a corner store, according to the New York Times.

Consumers assume an upscale business will charge more and therefore see the extra expense as fair. By contrast, consumers expect value- or mid-range-positioned companies to charge less, even if the product is the same. The context is known as framing, where the “positioning of choices prejudices the outcome,” as the Times reports. If the context matches the high price, people often accept that they must spend more.

While some consumers may choose to find a different context — like looking for a discount seller — framing is one reason why high-end brands are careful about not discounting their prices. The action alone might undercut their ability to charge what they already get. By framing your prices in a way that matches your brand positioning (value, mid-range, high-end for example) customers may be more likely to purchase.

3. Present pricing in an attractive way

Ending a price in 9 is a way for prices to appear lower to consumers, while still adding margin. This may be an old pricing trick that still works as the study Effects of $9 Price Endings on Retail Sales: Evidence from Field Experiments explains. The last digit in a price can increase demand, even when researchers tested prices a few dollars lower.

Additionally, researchers found that a longer-looking price can change how customers react, according to a study in the Journal of Consumer Psychology.

People translate visual representations of numbers into verbal equivalents, e.g., 72 becomes “Seventy-two.” So the longer a price is in the verbal equivalent, consumers mentally equate that with a higher price. To combat this effect, shorten lengthy prices by eliminating commas and decimals where possible. If you communicate a smaller verbal equivalent price, you may make the product psychologically more palatable to a consumer.  Which, in turn can increase sales.

4. Focus messaging on experiences

People don’t only buy products and services; they also purchase experiences. That is why many consumer campaigns emphasize how people will feel by using a product, instead of lower prices.

In The Time vs. Money EffectStanford Professor of Business Jennifer Aaker and Cassie Mogilner tested the concept by having six-year-olds operate lemonade stands. One sign read, “Spend a little time and enjoy C&D’s lemonade.” The second read, “Spend a little money, and enjoy C&D’s lemonade.” The third read, “Enjoy C&D’s lemonade.”

People could choose to pay between $1 and $3 for a cup of lemonade. Those who bought when the sign stressed time paid twice as much, because of their emotional response to the sign.

There was one exception to the findings: Ads for products people acquired for prestige did better when stressing money. The pleasure was in the possession of the product and status of the higher price, not the experience using it.

Psychological pricing tips are complex, and may even seem contradictory at times, because they are ultimately about people. Some tactics may work on certain consumers while others don’t — meaning it is likely you will need to experiment within your marketing strategy to see how they work for you and your customers and prospects; however, an investment of a little time and effort may be a small price to pay to boost sales.

 


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