Why is cash flow so critical to the business?
Monitoring cash flow is like having a health check for your business. Most small business failures are due to a lack of cash flow management.
• Do you have to understand cash flow?
• How does it work?
• How do we apply that to our business?
• It is also vital to know how cash flow is calculated.
What is cash flow?
It is a cash flow into the business; that is how the money comes in and goes out. It means positive cash flow if you get more money coming into the market than goes out. You will be able to pay your bills and invest the rest of the money in the growth of your business. If the money coming in is less than the money going out, you have a negative cash flow. In that case, you will find it difficult to pay the bills. It is where you need to manage it. You must analyze your expenses and control your spending. When you cut down your costs, your cash flow will improve, and you must maintain that.
How do you calculate your net cash flow?
I am sure you must know your total daily sales by now. Calculate the total of all your weekly sales to check your cash flow every week. In the same way, you have added up all your purchase receipts and get the sum to spend for a week. If the total sales exceed the total purchases, you have done well for that week. Then, continue monitoring your expenses every week to keep them under control. Then, you can also find ways of improving your sales to bring in more money. You might have thought you were doing well with sales, but managing cash flow would have shown you the reality. You have to go on checking at least for three months to make sure cash flow is under control.
Why do you need a cash flow report?
A cash flow report can help you make urgent management decisions for your business before it runs to ground from a cash deficiency. It will also help you assess where to focus your business efforts to increase some money. For example, it could help you find that your cash flow is harmful because of the large balance of outstanding customer accounts receivables.
Why is cash flow management important for a good business rating?
A positive cash flow is also essential for a good business credit rating. It can help you secure finance, attract investors, negotiate with suppliers, and win new business. Careful cash flow management can help you spot potential cash flow issues early and avoid financial difficulties.
What will happen if there is no cash flow management?
If cash is not maintained, it could lead to many problems, and I will show you some of them here.
Too much stock
When sales are reasonable, you might spend money on buying too much inventory. That is because you think there is a significant demand for your product. What happens if your customers find a different product type and move away from you? You will have too much stock and a hefty bill from your supplier.
You need to have proper credit terms.
If you sell goods on credit, you must ensure that your customers pay their bills on time. You must also be careful when allowing sales on credit, as bad debts could result.
Overspending
We all have this issue, but as a prudent businessperson, you should care when purchasing. Cash flow management assists you in keeping your expenditure pattern under control.
Growing your business
Now, you have a reasonably successful business with the help of cash flow management. Are you thinking of expanding your business? That means you will have more stock and staff and a different location. Due to more income and expenses, preparing a cash flow for your additional business would be ideal. You need to manage your cash flow again daily until the financial management is controlled.
This article has helped you implement cash flow management in your business. Always remember to check your cash position before you start to work first thing in the morning. It will help and inspire you to do better in your business.
