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Cash Flow Management and Your Business

Written by prositesfinancialMar 18 • 3 minute read

cash flow

A healthy cash flow is essential to your business for various reasons. It helps you settle debts on time, finance expansion, and manage day-to-day operations. The main objective is to have more revenue coming in than going out.

Smart business owners understand that profits are meaningless without cash. A healthy cash flow allows you the flexibility to take advantage of opportunities and weather economic storms. You’ll also sleep better at night knowing you can pay your employees and continue to generate products or services.

Fluctuations in net cash flow are related to changes in working capital, which affects your cash flow management. Purchases of fixed assets reduce your working capital, and conversely, selling property and equipment improves your working capital and overall cash flow position.

Cash Flow Basics

Cash flow refers to the movement of funds in and out of an organization. There are two main types: positive and negative cash flow. The former is the most ideal and occurs when your company receives more cash than it pays out. Negative cash flow, on the other hand, occurs when you pay more than you receive. Payments include monthly expenses, salaries, and accounts payable, while examples of revenue streams are accounts receivable and sales.

A negative cash flow can eventually spell doom for your business. Other than late payments on utilities and other expenses, it will force you to take loans to bridge funding shortfalls.

It’s easier to track your cash flow if you use the cash accounting method. However, the accrual method provides a more accurate picture of your long-term financial health. That’s because it records all inflows when earned and outflows when incurred.

Tips for Managing Your Cash Flow

Without proper planning, your business might experience negative cash flow even while other financial indicators show growth. The following tips can help you improve revenue while reducing cash outflows:

  • Reduce or eliminate slow-moving inventory: You can do so by offering discounts then use the extra revenue to produce fast-moving products or expand into new markets. This move also reduces storage expenses.
  • Encourage faster payment of outstanding bills: To accomplish this, you can offer discounts to those who settle earlier than the scheduled payment date. It’s essential to send out invoices promptly with a precise due date and notice of late fees.
  • Eliminate unnecessary expenses: Look for cheaper and more efficient equipment alternatives, train employees to improve productivity, and streamline daily operations.
  • Increase sales or product prices where feasible: Revenue-increasing strategies include aggressive marketing, creating new product lines, and offering bundled products. The extra cash will help you acquire higher-quality machinery, manage inventory, incentivize employees, and finance other operations.
  • Improve vendor relationships: It’s in your best interests to pay early for supplies if your vendor offers discounts. You can also negotiate lower prices or more incentives if you’re a long-term customer. If there’s no primary benefit, it makes sense to delay the payment as much as your invoice allows.
  • Consider leasing over buying: By leasing property and equipment, you can free up enough capital to invest in other ventures and finance vital operations. You also benefit from the latest equipment technology that is more efficient at a lower initial cost.

The Importance of Statements and Balance Sheets

A cash flow statement measures inflows and outflows during a given period. This document is a crucial tool for short-term planning. It shows whether you have enough cash to sustain operations and the functions that need more or less funding. The cash flow statement does a better job of helping you create excess cash than the P&L report. Other benefits include better cash budget assessments and working capital evaluations.

A balance sheet takes a snapshot of your company’s health at any given time. It shows the exact quantity of assets and liabilities of your business. You can also make valuable comparisons between debt and assets and compare your financial position to industry peers. Both statements are crucial to assessing your overall financial health.

Outsourcing Your Cash Flow Management

Although you can compile your cash flow statements through accounting software, it’s more beneficial to outsource the task to a qualified CPA. In addition to their years of professional experience, these accountants can identify valuable trends and reduce risks. They can provide crucial tips on how your business can improve investing, financing, and operational efficiency. A professional will also ensure your short-term goals align with your long-term objectives and help you make better business decisions.

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