What Is Cash Flow and Why Does It Matter?

Cash flow refers to the movement of money into and out of a business. Cash flow management is critical for maintaining vital financial records within a company for transparency; ignoring it can lead to significant issues. Analyzing these three critical parts of the cash flow will allow you to understand where you stand:

  1. Receivable Accounts: Money that is owed to you
  2. Payable Accounts: Money that you owe
  3. Shortfalls: How much money you need to pay the people you owe

Take a look at a few concepts:

Your Break-Even Point

Staying above your break-even point requires you to set reasonable financial goals for your business, and keeping accurate expectations of your expenses and revenue so that you can remain profitable. Try to budget some leeway for emergencies, unexpected expenses, and loss of customers.

Concentrate on Cash

Maintaining a positive cash flow allows your business the flexibility of being more liquid (immediate cash on hand), which can also indicate that your business is running smoothly. If you always have more cash than you need at any given time, you can easily make up for lost revenue or pending receivables.

Using Technology

Using accounting software enables you to stay ahead of the game and worry less about managing finances through outdated methods (physical books/documents), giving you more time to focus on growing your business. With all AR/AP accounting done in an accounting system, you can also run reports to see what your cash flow looks like in the upcoming week/months, and track down any transactions that will improve your financial standing.=

Control Spending

Mastering the art of spending can help you maintain positive cash flow. Frivolous spending can quickly take your business from being cash flow positive to cash flow negative in the blink of an eye. Make sure that you take cautious steps when budgeting expenses for your business, and don’t let a temporary boom in cash flow misrepresent your long-term financial situation.

Why Cash Flow Goes Negative

Poor cash flow management can be caused by the following:

  1. Excessive Inventory: You might have too much inventory on hand that you can’t move as quickly as you bought it
  2. Pending/lengthy payment terms: You are leaving too much time for your customers to pay your invoices, compared to when you have to pay your expenses.
  3. Excessive spending: You are spending based on your current balance, rather than an accurate assessment of your upcoming liabilities.

A Solution to the Problem

The most effective solution to poor cash flow management is simple, excellent bookkeeping. Proper bookkeeping and reports will help you avoid the pitfalls of poor cash flow management by keeping you appraised of your upcoming financial situation.

Photo by Pixabay

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