Cashflow is the spine of your business. That means, when it breaks down, your business is down. In fact, according to a survey conducted by Jessie Hagen of the U.S. bank, when companies fail for financial problems, poor cashflow is the reason behind it 82% of the time.
Considering the importance of managing cashflow in a business, we will first explain what cashflow is and how you can read a cashflow statement. Finally, we will get into the specifics of how to manage your cashflow effectively.
What is Cashflow?
In a nutshell, cashflow is the amount of cash that flows into and out of your business at a specific time. If you have a positive cashflow, you will have more cash coming into your business. That means you can pay your bills and cover other expenses.
In case you have a negative cashflow, you won’t be able to afford those expenses. Similarly, the concept of having enough money to meet financial obligations is known as working capital.
Is There A Relation Between Revenue and Cashflow?
Yes, there is! The revenue measures how much is coming into your business. On the other hand, cashflow measures how much money is coming in and going out. For example, if the bank just deposits a $10,000 loan into your account, it is considered as cash.
Is Profit Different From Cashflow?
Yes, profit is different from cashflow. You cannot look at your profit and loss statement and get a grip on your cashflow. Many other financial figures are factoring in your cashflow. For instance, accounts receivable, inventory, capital expenditures, accounts payable, and debt service.
Innovative cashflow management needs a solid focus on each of these cash factors besides your profit and loss. Profit is revenue minus the expenditure. Invoicing a customer for products and services you sold them creates revenue. In fact, collecting the money on that invoice creates cash.
Why Does Cashflow Matter?
If you don’t have cash in hand, your business will most probably stop working. Besides managing your cashflow, it’s about figuring out when you will have cash in your hands. To sum it up, managing cashflow is figuring out how to get more of it in your hands faster, managing your spending, and not running into cashflow problems like payroll.
Learning about how to manage cashflow is a foundational building block for managing your business finances. In case you have that down, you can start thinking about how you can grow your business.
As a result, you can improve your profit margins and grow a healthy business.
Positive cashflow transpires when the cash coming into your business from sales and receivable accounts is more than the cash leaving your businesses through accounts payable, salaries, and monthly expenses.
Negative cashflow transpires when your outflow cash is greater than the incoming amount. This is usually troublesome for your business; however, steps can help you fix the situation and collect or generate more cash along with maintaining or cutting down on expenses.
How to Manage Your Cash-Flow Effectively
In order to manage your cashflow effectively, follow these seven steps:
Bookkeeping matters a lot in a business. It is the best way to understand all the financial transactions in your business.
Having a bank account is great for this. Either way, you can use software or calculate it yourself using spreadsheets.
You need information from your statements and use it to understand how your money is moving throughout the business.
Simply relying on your credit card or credit limit to make your ends meet won’t help. There are some signs you need to identify for increasing your cashflow.
If you need more cash, it is a no-brainer to go out and try to attract new customers or sell additional goods and services to your existing customers.
Cutting Out On Expenses
Overspending can result in either covering unnecessary expenses or paying for expenses at unusual times. It would be best if you cut on overspending.
Speeding Up The Receivables
If you are waiting on invoice payments from clients or deposits from payment processes, the faster is, the better. Consequently, your cashflow would be better.
Clear Out Your Inventory
Clearing out your inventory will help to kick-start healthy cashflow. Also, try to employ discounted sales and planned promotions in order to move products as fast as possible.
Analyze your statements as a regular part of your office routine. The more you do, the better you would get at finding opportunities for increasing cashflow.
You need to keep in mind two things while calculating the cashflow in your business.
What is your cash balance right now?
What can you expect your cash balance to be in the coming six months?
If you cannot answer the above two questions, be ready for a roller coaster ride. And that can be really frightening!
However, one way to keep situations under control is to track down all your cashflow each month in order to determine if your management is creating the type of cashflow your business needs. Furthermore, this will help you manage your cashflow effectively and make business decisions about expanding.