Having money is a crucial matter for your business however you also need to know how and when the cash flows in and out of your business. You cannot learn this thing overnight as these are skills which concerned to monitor and manage cash for your business.
Calculating and monitoring cash flow is one of the most vital tasks of the business owner. Revenue, expenses & budgets are dynamic in a business thus the movement of money need to be planned for short & long terms, seasonal occurrences or big/small payments. It is not an odd thing nowadays to see businesses went bankrupt due to failures in paying bills.
Unfortunately, as several business owners concentrate solely on their revenues and expenses to manage their cash flow, sometimes poor management of cycles within the cash flow of their business results in problems and disastrous moments.
The golden rule of business is “money is king” thus a positive money flow means happiness in business.
- If money coming into your business > the money going out of your business = your company incorporates a positive cash flow.
- However, if your cash outflow > the money inflow = your company has a negative cash flow.
In order to maintain a positive cash flow, generate & collect a lot of money and at the same time – maintain your expenses.
One of the ways of managing cash flow for your business effectively is by having cash flow statement. The cash flow statement comes from the cash flow budget which is a forecast of receipts and payments. The budget shows if there is enough money is available for expenses, equipment and stock purchases. Cash flow also indicates whether external sources of money are necessary for the business. While several business owners assume that profits are the most necessary money element of an organization, lack of money is often the most important reason for business failure. In real case, a business could be profitable however, it doesn’t have the liquidity to pay its expenses. This situation shows that effective forecasting, planning and management of cash flow are essential for a company to achieve success.
Cash flow problems sometimes will occur in any variety of business life cycles. Most commonly this kind of problem can occur in spending or receiving and this is possible since money flow is about cash going out and returning in.
In expanding your business and growing it to the next level, you have to consider several important things other than cash which includes your clients, equipment, facilities, or inventory which result in money out of the business. In some situations your clients would possibly be slow paying and your company cannot create enough money thus good cash flow management can alert you of any urgent needs for money. Thus whatever happen to the the flow of your money, all of these problems have been taken into your account for monitoring & analyzing purposes.
In order to effectively managing cash flow for your business, you need to understand the connection between your Cash Flow Statement, Income Statement and Balance Sheet and what these financial documents are telling you.