Business - Importance of Cash Flow
Cash flow to a business can be a sign of it’s health or its pending demise. Simply put, cash flow is the money coming in to a business as well as the money going out. This includes everything from sales dollars to expenditures for office supplies. By understanding the true importance of cash flow, small business owners and entrepreneurs will be far more ahead of the game.
The Flow of Cash
The interesting thing about cash flow is that we tend to not pay attention to it until suddenly it seems there’s a kink in our hose of funds. We look down the open end of the hose, wondering where the cash is and suddenly we are sprayed in the face with a gale force splatter and then move on until the next kink happens. This would be an example of poor cash flow.
Sometimes your business budget will absolutely show you make more than you are spending and life should be great. The problem is your sales tend to be sporadic while your bills are consistently due at the first of the month. Suddenly, having enough money every month on paper doesn’t seem to be feasibly working. You have consequently entered a never ending cycle of playing catch up with your expenses and income.
How to Catch Up
There are well established accounting processes for establishing cash flow that affects all three flow types: operational, investment and financing cash flows. There are a few accepted practices that can help to boost your cash management that you may not be considering. In contrast, there are others that can mask a major underlying issue.
Building up a sufficient flow of cash to ensure your business is able to account for times of the month that expenses are higher than others can take time. There are some simple fixes to help, such as working with your vendors to change payment terms from due on receipt to due 30 days from order receipt. This gives a business time to sell the product that they have purchased the supplies to create and frees up cash while building sales.
Understanding the health of your business requires more than looking at the total dollars coming in versus the total dollars going out. Investing in the services of a financial expert may help your business to draw the parallels between solid cash flow management, sales, purchases and general operating expenses.
Tags: accounting processes, Business, cash flow, Financial