It is an obvious statement, but cash is very important to any business. Whether you are a small family-run company or a startup looking to make it big, having funds on hand is key. You need to have money around to expand and grow. You will never be able to make more money if you don’t have any to spend and invest in your company. The problem is that cash flow and profit are separate things and it is possible to have one without the other. There are plenty of ways to increase the cash flow of your business, but you need to be careful to choose the right method, one that won’t lead to the cycle of debt and repayment. To avoid cash shortages, you need to pay attention to what cash flow really is and how you can avoid problems with it. Read on to find out more.
The Basics of Cash Flow
The concept of cash flow is not complicated, but often keeping money can elude people. The process confuses them. Simply defined, cash flow represents the state of your bank account. It symbolizes the movement of money both in and out of your business. It can be easier to think about it this way: cash flow is your transactions. This means that if you have enough money to cover your bills, you have positive cash flow. Obviously if you don’t have a positive balance, you have a problem with the flow and shortages of cash. How do you find this out? It has to do with accounts payable and accounts receivable.
Accounts Payable & Receivable
Calculating your cash flow health is actually quite easy. You need to subtract the accounts payable from the accounts receivable. The former is the money that leaves your business—all the bills and expenses that you have to pay. It is liability and includes payroll, loans, and any other expenses that you have to pay. On the other hand, accounts receivable are assets. These are what keeps money going into your business, such as money you receive from customers from the goods and services you provide. When you subtract the total accounts payable from the accounts receivable, you will be able to determine what your cash flow health is.
Profitability & Cash Flow
While profit and cash flow are two separate things, you can determine the profitability of your business by calculating whether or not you are able to keep cash on hand. When you have positive cash flow, you will have the ability to expand. It is possible to turn a profit and have no cash on hand, but it will be more difficult to grow and thrive. Accomplishing both shows that your business model is healthy and will lead to opportunities and to moving forward and prosper.
Preventions & Solutions
It is always best to prevent a cash flow shortage before it happens, but you can’t always do so. First understanding how it works is imperative. Then with this knowledge you can know what you need to do to keep cash flow healthy. First putting together cash flow statements is very important. These include transactions, cash from operations, financing, and money you have invested. You can get accounting software that uses reports that include how much cash you will have during certain periods. When you have this knowledge, you will be able to forecast expenses and see cash flow problems before they occur.
You can also cut down on payroll, inventory, and other expenses. According to the site MoneyPug, which is known as a platform to find a payday loan, taking out short-term business loans is a very popular option to free up cash. However, these loans should only be used for specific expenses, not to put a bandage on an overall problem. Using short-term financing can help you overcome problems such as unexpected expenses, but if your business model is not conducive to cash flow you have other problems to solve.
It doesn’t matter how big your business is or what field you’re in, cash flow is key to expansion and the health of your business. When you have a good handle on cash flow, you will know what money you can spend, what you need to save, and how you can increase cash flow in the future.