Cash flow is critical to business because it allows you to meet your expenses and pay your bills. Nearly 82% of failed companies blame cash flow for their failure. It is important to understand what cash flow is, how to read a statement, and how to fix the problem if your cash flow isn’t good enough.
Cash Flow Explained
Cash flow is the cash that comes into and goes out of your business each period. The period can be any designated amount of time. When the cash flow is positive, you have more coming in than what is going out but when it is negative, you have more going out. The minimum you need is enough money to meet your company’s financial obligations, which is called your working capital.
Differences Between Cash Flow and Revenue
Revenue is how much money comes into your business, and cash flow is both what comes in and what goes out. Revenue is only half of the picture.
The Importance of Cash Flow
Cash flow is important because you need it to keep your business running. You need to pay bills and keep your business running, and cash is how you do it. Understanding cash flow helps you increase it, and knowing how to manage it is the key to managing your overall company finances.
How to Manage Cash Flow
First, you need to stay on top of your bookkeeping. This makes it easier to manage. You should also generate cash flow statements. Often an accountant does this for businesses, but you can use specialized software to do it yourself. Use this information to analyze your cash flow so that you know how money moves through your business.
You can also determine whether you need to increase your cash flow. If you are relying on a line of credit or a credit card, you will know that you need to increase your cash flow. You can increase it by cutting your spending. Once you go through it, you will be able to find places to cut your expenses. Another way to improve cash flow is to collect on accounts receivable. Don’t let invoices sit unpaid for long periods of time.