What is Cash Flow and How to Manage It?
No business should make the mistake of ignoring its cash flow. A lot of SMEs mention that cash flow issues often hampers the growth and development of their business. Here is a guide to understanding what cash flow is and the means to manage it through the proper calculation and production of cash flow statements.
What Does Cash Flow Mean?
Cash flow is a term referring to how money exits and enters your business, in the form of earnings and expenses. By having a cash flow that is positive, you are able to pay all your expenses and have a surplus to invest in your business. When you have a negative cash flow, you are compelled to find another source of finances to settle your debts. Net cash flow can be simply calculated by finding the difference between all your cash receipts and payments over a specified period.
Why Should You Manage Your It?
Failure to monitor your cash flow exposes your business to a variety of problems. You might end up having an excess amount of stock that you acquired due to a perceived increase in demand. You may also suffer constraints from offering long terms of payment. Additionally, you may be tempted to overspend or over-trade if you do not have a proper cash flow accountability to keep you in check. To manage your cash flow properly, you should regularly make a cash flow statement.
What Is a Cash Flow Statement?
It is a document prepared after looking at how money gets into and out of your business. It enables you to know how funds circulate in your business, its impact on how your business runs and how the payments match with your cash balances.
What Do You Include in a Cash Flow Statement?
It is essentially composed of three categories. Namely operating, financing and investing. In operating, your net income is added or subtracted from your liabilities and assets. Meanwhile, in investing, the figure shows any variation in the value of your fixed term assets. In financing, the figure present is an indication of the variation in long-term liabilities, dividends and owner’s capital.
Importance of Cash Flow Statement
In addition to giving you a summary of the amount of cash available for running operations, it also reveals whether your business is experiencing growth or not. This information is often key to the planning of the development of your business.
By having an understanding of what cash flow is, its importance and how to manage it, you will be able to keep your business operational.