Cash flow is the lifeblood of an organization. Cash flow is vital for the success of a small or mid-sized business. Without revenue, profit equates to nothing. Several profitable companies’ plans are bankrupt because the amount of earnings doesn’t equal the cash going out. Companies that do not give adequate consideration to their cash flow may not have the ability to make the investments needed to compete, or they may have to pay more to borrow to maintain operations.
Poor cash flow management is to blame for more business bankruptcies than in the past. Academic research has determined that cash flow problems are a leading cause of business failure.
There are several ways your business can improve its cash flow. Here are several additional resources to help you learn about cash flow.
Cash Flow Basics
Cash flow is the movement finances have made in and out of your company. You should be monitoring this either weekly, monthly, or quarterly. There are two significant types of cash flows:
Positive Cash Flow
If the cash deposits your business receives from sales, accounts receivable, etc., are more significant than the amount your company pays out from its funds payable, monthly expenses, wages, etc., then there is a consensus.
Negative Cash Flow
This occurs when expenses and earnings are in flux, and outflows are more significant than inflows, leading to troubles for a business. However, there are strategies you can implement to increase or decrease your expenses and generate or collect additional cash while maintaining or reducing costs.
Achieving positive cash flow is ongoing work. You have to focus on it and manage it to ensure everything is going well in terms of cash inflow and outflow.
Profit vs Cash Flow
Profit does not equal cash flow. Providing your P&L statement is not an adequate method of understanding cash flow. Other financial figures besides accounts receivable, inventory, accounts payable, capital expenditures, and debt service will factor into your cash flow calculation.
You’ve got to create profits to continue earning a profit. You can’t generate a profit if no cash flow exists. It’s the selling of your goods that generates a cash flow. But you won’t be able to produce the merchandise if you don’t possess the resources to do so. So you will need to structure your business to have a positive cash flow if you want your business to grow and become more profitable.
Managing Your Cash Flow
Comparable to having a healthy lifestyle and regular physical checkups enabling you to prevent and detect medical issues, paying close attention to your cash flow which is your company’s lifeblood, can also help you keep your company free of financial troubles.
Here are some helpful tips regarding cash flow management.
Monitor Your Cash Flow Closely
Paying close attention to all the metrics listed is imperative, especially in Metrics to Measure. In addition, it’s essential for you, or your chief financial officer, to quickly access this information.
Make Projections Frequently
Monitoring critical financial data or metrics will help you make better, more accurate, and more up-to-date information projections. Your business will likely be better able to understand and manage its finances.
Create an accurate cash flow forecast. When forecasting sales and expenses for a given period, consider historical figures, such as customer payment histories, industry norms, averages and trends, and current economic and business needs. Project monthly cash flows for the stated period. As you go through the budget cycle, compare and update your budget based on actual monthly performance.
Identify Issues Early
The sooner you identify a problem, the better and the easier it could resolve. However, remember that you must ask ahead if you want your help.
Understand Basic Accounting
By comprehending the essential concepts of basic accounting, you’ll be able to read and interpret financial statements. As a result, you will be more capable of tracking the financial health of your business and remaining positive cash flow.
Have an Emergency Backup Plan
If an unlikely situation occurs, you could find yourself in a pinch. A concrete plan will allow you to regain composure and act as a source of backup funds in an emergency.
Grow Carefully
You can sustain your business’s expansion only if money continues flowing into your business. However, you may get in a bind if you spend and make up the difference too fast. So, take precautions when growing your business and watch out for financial risks. Then, a business growth plan covers cash outflows and inflows to avoid any cash shortages or surpluses. Also, you must keep a close watch on managing cash flow.
Invoice Quickly
Any delay in processing the invoice may increase your expected wait for the earnings to arrive. Therefore, invoices should be issued as soon as a client receives the service.
Use Technology Wisely and Effectively
Tools have been developed to help you regulate your cash flow quickly and efficiently. Examples include software for small and medium-sized businesses, such as Moolamore.
CONCLUSION
In business, profit and cash flow are not always the same. If your firm uses the accrual accounting system, you will record the revenues owed at the time of purchase, not the payments you receive at the point of sale. Maintaining a healthy business, in the long run, is essential to maintaining a good monthly cash flow.
A cash flow app that pulls real-time operational cash flow reports from cloud accounting or CSV files, Moolamore does the heavy lifting for you. Do more with Moolamore!
