IMPORTANCE OF MAINTAINING CASH FLOW

March 24, 2021

For a business to operate successfully in the long term, there is a need for the generation of profit while still working with positive cash flow. Profits and cash flow are the most important aspect of a business. Managing a business without a proper forecast of cash flow is similar to driving at night with your sunglasses on. You might be moving in the right direction but not for long. If a business cash flow is negative, it is a major warning sign and it will only take a few weeks or months without enough cash before a business goes out of business. Salaries will go unpaid; suppliers will begin making demands for payments and landlords also start changing locks.

For your business to be successful, it’s important to keep an eye on profit and cash flow. Although both of these are essential, there exists a great difference between them and to make informed decisions, you need to have a better understanding of each term.

What is profit?

Profit is the surplus you get after deducting all expenses from your revenue. Profit is a reflection of your business financial status and it the basis for tax calculation. There are three types of profits that are used for analysis and that is net profit, gross profit and operating profit. Each type of profit provides different information that can be used in examining the company’s performance.  Absence of profit can sometimes result in declining cash flow.

What is cash flow?    

Cash flow is the movement of money in and out of business.  The flow of money in and out of business is very important for paying employees, purchasing inventory, operating costs, daily operations and paying taxes.  A positive cash flow is an indication that the liquid assets of a company are increasing and this allows you to pay for expenses, settle debts and reinvest in the business. As for a negative cash flow, it is an indication of decreasing in liquid assets of a company. Even with an overall high profit, if you have low cash flow, you may experience problems such as ordering too much stock or overspending.

The importance of keeping on to of your cash flow

Cash flow management is very essential in business as there are regular bills that need to be paid from rent to salaries of suppliers and raw materials. Additionally, sending for unplanned expenses will always be there. The only way business can pay for such bills is if there is money in the bank as it is impossible to pay bills with theoretical money. This is where cash flow forecast and cash flow planning comes in and it is all about ensuring that you know when to pay money out and that’s when you have incoming money. If there is a shortfall, immediate action needs to be taken. Some of the benefits of being on to of your cash flow include:

●        By having an accurate cash flow statement, you will be able to make better plans and decisions. If you poorly manage your cash flow, you may end up making a bad decision and this puts your business at risk.

●       Better management of your cash flow significantly contributes to protecting your business relationships.  If you are experiencing cash flow problems, there will be no funds to pay your suppliers and this can harm your relationship with them and it will damage your overall reputation.

●       Managing your cash flow effectively allows you to know the right time for expansion. Although expanding and growing your business is exciting, if you expand at the wrong time you will experience several issues in the long term.

Tips on maintaining your cashflow

Some of the things that you need to do to improve your cash flow include:

●        Learn to invoice early and get money in the business. Most clients will rarely make payments unless they are invoiced.

●       Control your spending as this limits the amount of money leaving the business. Besides, learn to control your costs by keeping hold of your cash.

●       Get a smart digital product to help you in cash flow forecasting. The best way to effectively manage your cash flow is by having reliable and accurate financial forecasting information and this can only be done by having accounting software.

Monitoring your cash flow in the business does not have to be stressful. By applying some of the tips above, you will be able to increase your cash flow and thus run your business with minimal issues.