Effective cash flow management is crucial for any type of organization, whether it is expanding or contracting. For many, it even means the difference between survival and success. Most likely, you've heard that more than 60% of fair firms are still profitable they just ran out of money.
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Important Cash Flow Basics
You can encounter a financial crunch if you've used up all of your working capital, which would make it impossible for you to make payroll, purchase supplies, or even pay suppliers. Cash flow management is the answer to the issue of the time gap that exists between when you must pay your suppliers and when you get payment from your clients.Because of this, it's imperative to keep your working capital at a level that enables you to go through difficult times and carry on running your company. To put it simply, managing your cash flow involves pushing your customers to make their payments as soon as feasible while putting off cash outlays for as long as possible.
Before we delve into the strategies to improve & manage cash flow in your business, lets first look at the the basics of cash flow management.
what is cash flow?
So, what is cash flow? It’s basically the movement of funds in and out of your business. Typically, businesses track cash flow either weekly, monthly or quarterly. There are essentially two kinds of cash flows:Positive cash flow
This occurs when the cash entering into your business from sales, accounts receivable, etc. is more than the amount of the cash leaving your businesses through accounts payable, monthly expenses, employee salaries, etc.Negative cash flow
This occurs when your outflow of cash is greater than your incoming cash. This generally means trouble for a business, but there are steps you can take to fix the negative cash flow problem and get into the positive zone. Cutting business expenses is one of the quick fix, we’ll discuss more strategies in detail soon.These critical numbers tell you just how much is coming in and how much is going out of your business. Making more than you’re spending? It’s all good. Cash flow regularly edging into the negative zone? Not so good.
Profit Does Not Equal To Good Cash Flow
Gaining insight into your cash flow requires more than merely glancing at your profit and loss statement (P&L). Factoring your cash flow involves a number of other financial metrics, including taxes, inventories, accounts payable, receivable, and capital expenditures.You must pay close attention to each of these cash generators in addition to your profit or loss if you want to manage cash flow effectively. Profit is simply defined by accounting rules as revenue less expenses. But as any astute business owner knows, knowing whether or not you made a profit does not always translate into knowing what happened to your money.
Find Out Your Breakeven Point
It is important to know when your company will turn a profit because it provides you with an early benchmark to aim for and a ready-made target for estimating future cash flow, not because it will impact your cash flow, which it won't. A combination of negative cash flow and negative earnings can be depressing. Concentrate on controlling your cash flow so that you can eventually reach the point at which you start turning a profit.What You Don't Measure, You Can't Control
The first stage is determining how much working capital a business requires to run. You must respond to inquiries such as:- How much inventory do I need to hold?
- How many invoices are overdue?
- How much cash is tied up in work in progress?
- How long does it take from paying our suppliers for the materials to extracting cash from the customers?
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