A healthy cash flow is key when it comes to running a business. But what exactly is cash flow, why is it so important, and how can you improve on yours?
At its core, cash flow is the shifting of funds in and out of a business. It’s typically tracked weekly, monthly, or quarterly. There are two sorts of cash flows:
A healthy cash flow is key when it comes to running a business. But what exactly is cash flow, why is it so important, and how can you improve on yours?
At its core, cash flow is the shifting of funds in and out of a business. It’s typically tracked weekly, monthly, or quarterly. There are two sorts of cash flows:
This occurs when the cash coming into your business is more than that leaving it. It means your income from accounts receivable, sales, etc. outweighs your expenses.
Negative cash flow is when a business’s outgoing cash is greater than its incoming cash. This is typically a bad sign and indicates damage control measures should be implemented. Identifying which type of cash flow you have is the best way to determine the health of your business. Typically receiving more than you’re spending? You’re in a good position. Cash flow trending towards the negative? This is a problem.
Some people tend to rely on their profit and loss statements to get an idea of cash flow. This is a mistake. Cash flow monitoring takes many financial figures into account that are neglected by profit and loss statements. These include:
Effective cash flow management requires a specific focus on each of these factors in addition to your profit and loss. Confusing the two is a quick way to muddy the waters of your financial strategizing and negatively affect your business.
Now that you have an idea of what cash flow is, let’s take a look at some strategies you can employ to maintain a healthy cash flow.
Your cash flow will only ever be as accurate as your reporting and accounting. It’s essential that you keep accurate books. Ensure your accounting information is kept up to date and ensure your bookkeeping efforts are accurate by working with www.excitepreneur.net Don’t be too soft with customers Maintaining an effective invoicing strategy is essential to the success of a business. There’s very little use in racking up your accounts receivable – money is only good when it’s in your accounts. Keep a close track of your receivable turnover and watch for spikes. If you notice any trends upwards, it may be an indication for you to step up your efforts at chasing payment.
Do yourself a favour and don’t try to do everything yourself. Make use of quality accounting software and use it to automate your processes where possible. This is where tools like QuickBooks come in handy. QuickBooks software allows you to keep a close eye on your cash flow trends, and you can even hone in on cash flow categories you’re concerned about as well as review distinct time periods. With a tool like this, you’ll be able to stay on top of your cash flow.
It can be all too easy to lump your personal and business finances together, particularly if you’re just starting out. This is a mistake. Keeping your finances separate allows you to better understand your business’s cash flow and forecast how it might change. Legally structuring your company under the right business entity is a key way to separate your personal and professional finances. Choosing to incorporate can be the optimal approach. This type of entity provides limited liability and is excellent for asset protection and tax advantages. And as a corporation, you’ll also have a more professional image, the ability to work with investors, and a corporation is transferable.
Having a cash reserve can mean the difference between your business surviving hard times or sinking into oblivion. Every seasoned entrepreneur recommends building a cash reserve. A cash reserve acts as a safety net when your business is hit with an unexpected event. It also lets you take better advantage of financial opportunities when they present themselves.
A healthy cash flow is crucial to the survival of your business. Now you know everything there is to know about cash flow: what it is, why it’s important, and how you can maintain a healthy cash flow. The article is provided by Dean Burgess. You can contact him by e-mail at dean@excitepreneur.net Visit his website for more useful tips for your business www.excitepreneur.net
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