Cash flow is the backbone of any business. For a business to run properly, profits are important, but without adequate cash on hand to meet the day-to-day obligations, even companies that are profitable will struggle. As a business owner, it is important for you to understand cash flow and the cash flow process. This guide will ensure that you understand the same and why it is important for you.
Understanding the Meaning of Cash Flow
In simple terms, cash flow refers to the movement of money. The flow of cash into your business and out of your business makes up the entire structure of cash flow. There are two main parts of the cash flow process that you need to understand to grasp the entire process.
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Cash Inflow - Inflow refers to the money that is coming into your business, including sales, accounts receivable, investments, and even loans.
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Cash Outflow - On the other hand, outflow is the money that is going out of your business for things like supplier payments, payroll, rent, utilities, and taxes.
When a company is receiving more money than the amount that is going out, then this process is known as positive cash flow. Negative cash flow refers to the phenomenon when the outflow of money is more than the inflow.
Why is Cash Flow considered more important than profit these days?
In some cases, the cash flow of an organisation matters more than the profit the company is receiving, and there are different reasons for the same.
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Liquidity - Even if your company is profitable in books and paper, you will not be able to pay your bills if you do not have cash in hand.
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Flexibility - Cash flow ensures that you have sufficient funds available, allowing you to take advantage of various opportunities, such as investments, growth, and bulk discounts.
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Survival - Businesses that do not plan their cash movements properly can face numerous challenges like vendor defaults, payroll delays, and even insolvency.
Accountinglads, one of the most famous cash flow management services, mentions that lack of liquidity due to poor cash flow is one of the leading causes for business failure, as compared to lack of profit.
How can you simplify your Cash Flow Process? A Step-by-Step Guide
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Forecast Regularly
Cash flow forecasting is the first thing that you need to focus on- like projecting inflows and outflows for 30, 60, or 90 days. It is designed to help you realize shortfalls before they actually occur.
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Closely Monitor Inflows & Outflows
Cash flows in and out. Receive sales, receivables, or expenses, and payables. Are seasonal dips involved? Suppliers may demand early payments.
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Optimize Working Capital
You should also focus on optimising your working capital by speeding up accounts receivable and keeping your inventory lean to ensure that you have enough cash in hand at all times.
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Control Expenses & Budget Flexibly
Make budgets and compare actual vs budget (variance analysis). Where possible, cut or delay non-essential spending when cash is tight.
If you find the entire cash flow management process highly overwhelming, then you do not need to worry, as services like AccountingLads will ensure that your task is being taken care of. The service will ensure real-time cash flow forecasting and tracking, and will optimise your working capital to ensure that you are never low on cash.
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