Many people have heard the saying that cash flow is king in the business world. The fact of the matter really is that cash flow is one of the most important aspects of a successful business if not the most important one. Cash flow is what keeps the financial markets all over the world functioning and making progress. It is essential that your business have proper cash flow and a good understanding about how to make this happen.
Business doesn’t happen until goods or services exchange hands and money of some kind is offered in return. This is the basic cash flow process. A service is offered and a monetary exchange is enacted to secure the transaction. If this process isn’t completed, then no business can function properly and progress in the business world would stop. Many businesses put more stress on profits than on cash flow and this is one of the biggest reasons that new businesses fail. It doesn’t matter how much profit you make on a sale or shipping a crate of your products if there isn’t any kind of money flowing through the system.
Many business owners are unrealistic about their expectations for cash flow in any given period of time and overestimate income while underestimating expenses. Income and expenses are both very important factors in the cash flow question and determine how much money is really being made by a business. A company can run into serious trouble when they just have more money flowing out of the business than flowing into it.
Understanding this basic concept can make it much easier to understand how to fix the problem. Profit is really defined as the difference between income and expenses and cash flow is the difference between incoming and outgoing cash. Another reason that many small businesses fail is that they don’t anticipate cash flows correctly and simply find one day that they don’t have enough money to pay the bills and then have to just stop operations. This is what kills the business and makes it impossible to continue.
Calculating cash flow is a very important part of the accounting process and should be calculated monthly. This can vary for different businesses depending on how cash intensive they are and how strict creditors are on payment terms. Most business accounts allow for 30 days to receive payment after a service or good has been provided.
Projecting cash flow doesn’t have to be rocket science if approached correctly. You should first start with how much cash is actually on hand in the business. This is what is in the bank account for the business and what actual currency you have at a place of business. When you know what amount of cash you have on hand, then you should make a list of all the expected outflows or expenses you will have for the next month. This is something that you may have to guess on, but you can probably get pretty close if you spend enough time thinking about it.
You then should make a list of all expected inflows of cash like customer payments, collection of debts and any interest or investment earning. It’s important to consider the amount of the inflow and also when it will occur. The timing can be a very important factor. When you have all of this information gathered together, put it all in a spreadsheet or financial program in chronological order. If there is ever a point where you see a negative cash flow in the business, there is a problem that needs to be addressed or you will likely have some serious problems down the road. Many people neglect to go through this process and so don’t realize that cash flow is an issue until it’s too late. Make sure that you aren’t a victim.