A ‘Cash Flow’ can be described as a real or virtual movement of money. In a narrow sense it can be explained as a payment made from one central bank account to another, the payments that are expected to happen in future which are uncertain and as a result, need to be forecasted with cash flows.
What is Cash Flow Management?
The management and analysis process of a company’s cash flows is said to be Cash Flow Management. This cash flow management process allows a company to estimate the amount of cash it will have on one hand at any one time, the project trends in cash inflow and cash outflow and also evaluate whether a surplus or a shortfall in cash could possibly occur. It can also be defined as the process of monitoring, analyzing and optimizing the net amount of cash receipts deducted from cash expenses. An important measure of financial health for any business is the net cash flow.
Importance of Cash Flow Management:
According to a study performed by Jessie Hagen of U.S. Bank, 82% of businesses fail because of poor management of cash flow. As success or failure, both depends on how a business manages its cash resources. It is a known fact that without positive cash-flow, a business will not be able to survive for very long.
‘Cash Flow’ is the lifeblood of any business (For Business loan Advice). With the proper cash flow, a business can be able to purchase supplies, hire employees, pay for its rentals, advertising costs and take care of the other various business activities.
Sources of Cash Inflow:
Cash is generated into a business through
- By selling off the company’s products or services also called as revenues.
- Contributions by the owners in the form of capital or shareholder loans.
- Any forms of credit or borrowings made by the business.
Sources of Cash Outflow:
- By making repayments of loans.
- By purchasing business assets.
- Day-to-day business expenditures like rent, wages, and salaries etc.
Why are operating cash flows the most important?
The sign of a good business is that it should be generating the majority the cash flow from operating activities like the sale of real products or services. Continuously borrowing from lenders and even getting funds from shareholders to stay adrift is not a sound business for sure.
Cash inflows and outflows generally take place through the sale of company’s products or services and other day-to-day business expenditures. The health of a business can be recognized through its operating cash flow.
A business can also generate additional cash inflows and outflows through investing or financing activities, but they are not to be considered as the core source of cash for the business and can be considered only as a supplementary aspect.
How can you create a basic cash flow statement?
You can easily create a cash flow statement without facing any challenges. It is basically the process of taking into account all your business inflows during a specific time period, deducting the cash outflows to acquire the net change in your cash position for a definite time period, generally on a monthly basis. It can either be done manually or by using an accounting software package or a spreadsheet tool which can be handled very easily.
How to solve cash flow problems?
You being a business owner need to take the responsibility to perform a cash flow analysis and use cash flow forecasting so that you can take the necessary steps to solve all your cash flow problems. The cash flow analysis is now made easier as many software accounting programs are built-in reporting features.
Strategies that will help in maintaining an adequate cash flow for your business shall be developed. For an expanding business, one or more injections of cash will be needed during the growth phase. Also for small businesses you can shorten your cash flow conversion period so that fast money can be brought in your business.
It is very imperative to have an updated business plan in order to present to financial institutions or investors. The business plan should be made with such a purpose so that there will be a need to finance the company for future as well.
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