Cash flow is the amount of money coming into and going out of a business, as reported in earnings announcements. It can refer to a single project or the entire business.
Some traders use cash flow as a means of judging a business’s financial foundations. If there is a large amount of cash coming in, there is more available to reinvest in the business. Cash flow can be easier to compare between businesses as it is not subject to accounting rules.
Cash flow is not necessarily a sign that a business is profitable, but does indicate its liquidity. Total cash flow is calculated by deducting the total costs and adding incomes over a period of time, to give the change in cash balance. There are many other types of cash flow, though, depending on which aspect of a business’s cash flow is being calculated.
Even a profitable business can fail if operating activities do not generate enough cash to stay liquid. This can happen if profits are tied up in Accounts Receivable and Inventory, or if a business spends too much on capital expenditure.
Stakeholders such as Investors and creditors, therefore, often times, want to know if a business has enough cash and cash-equivalents to settle short-term debt or liabilities. To see if a company can meet its current liabilities with the cash it generates from operations, analysts look at debt service coverage ratios.
Like the popular saying, “Cash is the Key” in any business. When cash flow is going well for a small business, it is a good indication for business growth and flow in business processes. If otherwise, it is a common gesture of chaos incorporated in business.
There are basic cash flow tips that enable small business maintain the best business touch;
- Avoid Trade;- Just Stay Away from it!
Small business often use it but its devastating to small business because no cash is being exchanged between the two parties. Additionally, you have to spend cash to provide your services, such as providing inventory, pay employees, pay rent, and more importantly, you have to pay taxes. Positive cash flow indicates that a company’s liquid assets are increasing, enabling it to settle debts, reinvest in its business, return money to shareholders, pay expenses and provide a buffer against future financial challenges. Companies with strong financial flexibility can take advantage of profitable investments. They also fare better in downturns, by avoiding the costs of financial distress.
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- Account Receivables Management;- Receive as Fast as Possible
This means you want cash to get back into the business from your customers or your clients as quickly as possible. You may want to avoid being the ‘Bank’, concentrate in running the business and let someone else lend the money. That is why some experts recommend business accept credit cards which is considered well worth it even with the discounts, to maintain positive cash flows and also cut down on receivables.
Develop a discount program to encourage quick payments, collecting cash owed to you as fast as possible. Normal payment terms allow a 30-day period for remittance after the receipt of an invoice, with a 2% discount if paid within the first 10 days. You can offer more, less, or no discount for payment, depending upon your needs and your customers’ previous pay habits.
- Account Payables Management;- Pay as Slowly as Possible
Good account payable will ensure an ethical way of maintaining your cash flows. An invoice returns of Net 30 terms should always be fully taken and made a better use of, to leave money in your Bank as long as possible to service short term obligations of your business. Also consider monthly serviced credit cards for immediate request for payment, which gives you additional 30 days to pay off and leave cash for your business.
- Maintaining a Unique Business Process
Those business processes that lead to generating money in your business should be maintained consistently and continually flowing. This will create continuous flow of cash into your business and avoid those chaos moments in business.
Effective Cash flow management gives leverage to a business, ensuring continuous operations and future growth.
Do You Need Accounting Help?
Consistent up to date and cleaning of accounting records for sound business decision making, may be posing some difficulties when you are preoccupied with other business functions. Is it time to consider independent professionals because of certain technical complications that could occur along the line? It could also be daunting, time-consuming procedures. Not recording correctly and poor monitoring can cause complications and confusion.
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