Today, we’re talking about a topic all businesses need to be aware of: cash flow. This blog will explain what it is, why it’s important, and how your company can manage it. Cash flow may not be the most glamorous or entertaining aspect of business management, but it is something you truly cannot neglect.
What is cash flow?
Cash flow is rather self-explanatory, yet a lot of people confuse it with income statements. An income statement shows your financial health over a specific period, listing your gains, expenses, losses, and revenue.
On the other hand, cash flow looks at the movement of money currently happening throughout your business. It shows how much money you’re spending against how much is currently coming in.
You can have positive or negative cash flow – positive is when there’s enough money coming in to cover all the money going out. In essence, you’re able to pay for everything. A negative cash flow is the opposite; there’s more money leaving than coming in, so you’re left with lots of unpaid expenses.
Why is cash flow important?
Cash flow is critical for the success of your business as it helps you manage your finances. You get a better view of how things are situated, allowing you to make more informed decisions.
For example, a negative cash flow can indicate that you’re not being paid quickly enough by clients. It empowers you to contact clients and demand payment, so money starts flowing through your business again.
Managing your cash flow can also help you cut out unnecessary expenses or avoid debt. The aim is to be in a positive cash flow as often as possible as this means your business is full of money and you’re not delaying payments or falling deeper into financial debt.
How do you manage cash flow?
On the surface, managing cash flow is simple. All you need to do is track your expenses and income sources. Some accounting software will help you do both of these things and you can immediately see money coming and going.
Of course, you also need to manage any delayed payments. This means you shouldn’t just track your income, but rather your sales or scheduled income. The benefit of using software for this is that you see all these figures in one place. It’s easy for you to notice a negative cash flow, meaning you can instantly act and try to stem the flow or get more money in.
It goes without saying that cash flow management is an ongoing process. Unlike income statements or tax reports, you’re tracking cash flow every single day/week/month. If you stop keeping an eye on it, you’ll have no idea about the financial health of your business.
And that’s a fantastic place to conclude this post. Cash flow is the amount of money moving in and out of your business. Therefore, it is one of the best metrics to see how financially viable your company is at any moment in time. Managing cash flow is critical for making better business decisions and this can all be done by tracking your sales, expenses, and other income sources. Aiming for a positive cash flow is a simple way to guarantee your business thrives.