Beginners Guide to Cash Flow Management
Having a clear cash flow management system in place allows you to identify and plan for recurring expenses, like payroll and supplies.
Having a clear cash flow management system in place allows you to identify and plan for recurring expenses, like payroll and supplies.
Cash flow management is the process of tracking how much money is flowing into and out of your business. Having a clear cash flow management system in place allows you to identify and plan for recurring expenses, like payroll and supplies.
It also allows you to predict and plan future cash flow for potential growth. Cash flow management ensures that you have cash available when needed, for recurring expenses and expansion. For small and medium-sized businesses, a good handle on cash flow can make the difference between success and bankruptcy. That is why they say cash is king.
Cash flow can either be positive or negative. Positive cash flow means more money is coming into the business than is flowing out. Negative cash flow is the opposite: the business expenses exceed the cash coming into the company. Even if your profits exceed your expenses, you might not have positive cash flow. That is why it is so important to look beyond income and expenses and put in place a cash flow management system.
Profits are the income on goods or services of your business. Profit is simply revenue (income) minus expenses. Whether you earned a profit or created a loss is important, but that does not give the picture of cash flow.
Cash flow is how much of that revenue has actually been collected and where it is in the production process. If you have made a sale to a client and issued an invoice, your profit and loss statement will show revenue. But until the client pays the invoice, you will have negative cash flow on the transaction.
Continuing the example, if the client does not pay on time, you might not have the cash needed to cover the payroll at the end of the month, or to buy the supplies necessary to produce more goods. Without material to produce final products, future income is curtailed.
Cash flow management is the process of ensuring you have enough cash available at every stage of the business operation so that you never come up short. A profit on paper is excellent, but if you cannot produce more products to sell, the business’s growth will be stunted.
Cash flow management is essential to ensure continued expansion and greater returns. Planning for future growth includes opening additional offices or production facilities, investing in a larger inventory, or expanding a product line. With a good cash flow management system in place, you can plan for these expenses in the coming months or years.
Without cash flow management, the business is left chasing the next expense and trying to keep up. Cash flow management helps to build growth potential into the business.
How do you know if your company has positive cash flow? To understand your company’s current cash flow situation, look deeply into not only revenue and expenses, but also accounts outstanding or in collection, inventory, supplies, and liabilities.
Most accounting software will generate a cash flow statement, or an accountant can help to get a clear picture of the current business cash flow as well as suggest steps to improve cash flow.
Improving cash flow can be as simple as tightening receivables and lines of credit. Here are five tried and true way to move toward sustainable positive cash flow:
Cash flow management takes time and attention, but can make the difference between success and failure for your business. Whether you choose to hire an accountant or use one of the many accounting apps available, regular management of business cash flow will allow you to plan for business expansion and growth.