For any business, cash flow is an essential issue. It is imperative to keep money around, and to do so you need to understand how cash flow works and what you can do to prevent problems with it. A business needs cash on hand to expand and to thrive, but more importantly it is key to avoid issues with cash shortages. If you have no funds to spend or invest, you may find yourself taking out loans to your detriment. But we will get there. First things first. Understanding the basics of cash flow is everything.
Cash Flow: What is it Really?
The concept of cash flow is not complex. It is actually quite simple. The flow of cash refers to the money going in and out of your business. While it is not complicated, it is harder to keep cash in the business than one would think. It is tough to keep money in the bank if you are trying to grow your business. But when you do have enough money to cover the bills and other expenses, you have positive cash flow. The opposite, when there is no money coming in, that means you have negative flow. While cash flow isn’t everything, it is essential for expansion.
Cash Flow vs. Profit
It is extremely important to know the difference between cash flow and profit. Profit is how much money you are making, but you can have negative cash flow and still turn a profit. It depends on how much you are expanding, what your expenses are, and how much money is coming in through sales. While it is beneficial to have both profit and positive cash flow, they are separate issues. Making sure that the rate in which you have cash coming in meets your requirements is key, but you can also use cash flow to determine the profitability of a business.
Determining the Profitability
Although cash flow and profit are different and distinct from one another, you can use your cash flow to find out what your profitability is. You will use your accounts payable and accounts receivable. The former represents the money that you owe, bills, payroll, and other expenses. Accounts receivable is the money that comes into your business from sales and other means. These are assets that keep track of the money entering the company. They are an important part of calculating profitability.
To make this calculation, you add up all of your assets and subtract them from your accounts payable. If the result is possible, your business will likely be profitable. While cash flow isn’t the profit, money in the bank represents that your business will be able to make money and expand.
Preventing Cash Flow Shortages
The first step to preventing problems with the flow of cash is to understand it. Once you realize that you don’t only have to pay attention to profit but to the money that you have on hand at any given time, you will be able to prevent shortages. There are many ways to do this. You can cut down on payroll. You can take a better look at your inventory. You can move facilities. There are options.
A bigger problem than seeing cash shortages before they happen is failing to do so. When you are in the thick of it, having problems with cash can put the business to a standstill. If this happens, you have less options. According to the site MoneyPug, which is used to find short term loans, when a company is experiencing cash flow problems is when they are most likely to take out a business loan.
While this is not necessarily a bad choice, you want to be careful with how much you take out and for how long. You want to pay the money back immediately to avoid fees. Always avoid falling into the trap of loans and debt. Typically using a loan to pay for a specific thing, like an accident or unexpected expense, you will be able to use the loan to pay for it and move on.
The bottom line is that you want to avoid cash problems before they happen, but if they do you should handle them carefully and concisely. When you take these steps, you will learn how to free up cash in your business to make a profit and expand.