A crucial part of running a business is keeping the money aspect under control and viewing it regularly, consequently, cash flow is something that can’t be ignored. Find out exactly what cash flow is and how to organise and focus on your finances.
What exactly is cash flow?
In a nutshell, cash flow can be explained as the amount of money coming in and going out of the company over a certain period of time. Your company’s cash flow statement can be viewed as one of the most, if not the most important financial statements issued by your business; this is referred to as ‘cash is king’. You can invest and grow as a company with positive cash flow and it’s best to have higher inflows than outflows, if your outflows do happen to appear higher than your inflows, this is negative cash flow. Cash flow can be examined to check if your company can pay its liabilities or invest in new ways to invest money.
How to deal with negative cash flow
Not every business has a positive cash flow, especially smaller businesses that are just starting up or those that have been affected by recent negative events. When this happens in terms of personal finances, you can turn to options such as payday loans to help with an emergency cash flow issue. If your company is in an awkward position and can’t find ways to improve a negative cash flow, there are similar options available to help for businesses. It is recommended to only take out further borrowing if you’re able to pay them back after making profits.
Another option is to review your largest outgoings and try to cut back on areas of the business that aren’t helping you grow. Unfortunately, some have to let employees in certain departments go or give up an office for remote working to save on energy bills and equipment. However, negative cash flow doesn’t always indicate the business is at a loss; it could just happen that your expenditure is very high for a certain period of the year and the ingoings aren’t adding up just yet. Make sure you evaluate cash flow on an overall scale!
The different types of cash flow
The main types of cash flow are investing activities, operating activities, and financing activities. Investing includes anything related to cash activities to noncurrent assets, and operating activities are more focused on the cash activities relating to net income. The financing activities involve equity and noncurrent liabilities. It’s key to know the difference between them.
What’s the difference between cash flow and profit?
Cash flow and profit are not to be confused. Cash flow measures the business’ ability to pay liabilities depending on the inflows and outflows of cash. This is different to profit, profit is the measurement of financial gain overall. Once you know the difference it becomes more straightforward to manage your business finances and work out how to maximize profits.
Now that you know the importance of cash flow and keeping your finances in order, it’s a great time to review the ingoings and outgoings of your business, if you haven’t already done this. It’s worth setting some time aside or employing an accountant to focus on this aspect of your business.