Cash is the heart of business. Upon it depends the beginning, rise, and the end. And to sustain a business, cash must keep flowing, no matter what. Before moving on how to ensure cash continually flows, let’s take a step back and look at what it is.
What is Cash flow?
A business primarily generates money through sales, financing, and return on investments. This is cash flowing in.
But in order to generate money, a business needs to spend it—supplies, paying employees, utilities, all expenses contribute to cash flowing out of the business.
If a business is spending more money than it is generating, cash is flowing in a negative direction. A cash flow negative indicates the business is not performing ideally.
If a business is generating more money than it is spending, cash is flowing in a positive direction. A cash flow positive indicates the business is performing well.
Calculating the amount of money moving in and out of your business checking account is the easiest way to measure cash flow. If you have more money in your account than you had at the start of the month, cash flow is positive.
Importance of Cash Flow
Having looked at what cash flow is, it is easy for us to understand the importance of cash flow. If you have a positive cash flow, it means your business is doing something right. And a negative cash flow means some aspect of your business is struggling since cash isn’t moving fluidly.
Cash flow is a credible indicator of business performance.
Aside from being a performance indicator, cash flow is crucial to keep your business running. You cannot pay your bills or your employees on time if you don’t have liquid cash.
Solely depending on sales for your business to flourish is short-sighted. Investment is key to leapfrog towards business success. However, without a positive cash flow it isn’t possible to invest in opportunities.
Unforeseen circumstances are a part of life. With a healthy cash flow a business can keep functioning efficiently if equipment breaks or an employee gets injured.
Considering the importance of Cash Flow, let is imperative to regularly make cash flow forecasts.
Cash flow forecasting
The essence of forecasting is spotting trends in your business activity. With a clear idea of business activity, you can ensure long-term stability in your business.
By monitoring trends you can predict when the business might run low on cash. Knowing this, it will be easier to find sources of loans and investments. Since creditors require signs of stability, getting loans during a crises can prove to be difficult.
Cash flow forecast can also help you acquire expensive equipment without effecting daily business functioning. Purchasing technological equipment is a great way to improve business efficiency. But they are expensive and it isn’t always possible to take dedicate a large amount from your business account. Forecasting can help estimate the best time to make such a purchase.
Forecasting can also help account for unexpected setbacks. Clients can often extend payment deadlines.
Common Cash-Flow problems
Unpaid invoices: Reassess payment policies
High inventory: Low sales:
Business just isn’t profitable: Sales are declining
Unpaid invoices is one prime reason cash-flow problems arise. Running a successful business does mean being flexible with customers. But if that flexibility interferes with maintaining cash flow, success won’t ever arrive. If there is a particular client consistently late on their payments, it is advisable to draft an email reassessing your payment policies with them.
Having a high inventory with low sales is another reason cash-flow problems can arise. Inventory requires maintenance and that costs money. If your sales aren’t that frequent yet inventory is present, it can take toil on your cash flow.
A business not being profitable can also translate into cash flow problems. In this case, the first step is to look for creative ways to cut costs; for example moving computer infrastructure to the cloud can not only save money but boost productivity.
To summarize, cash flow is a prime determinant of your business success. Its important cannot be underestimated. Frequent cash flow forecasting will help you gain important insights about your business performance.