What is cash flow?
Cash flow is the movement of money in and out of a business during a period of time. This comprises cash inflows and cash outflows, cash inflows is the money that comes into the business through revenue. Cash outflows on the other hand is money going out, like business expenses such as rent, salaries, loans, goods.
Why is cash flow important?
Cash flow is important to keep a good grasp on the financial aspects of your business.
Having good cash flow means you will have money each day for your expenses, and it helps you understand if you need to make certain decisions whether its to reduce your spending or if you have extra money to apply elsewhere. Furthermore, when your cash flow is good you can avoid running out of money, so needing emergency funds like a loan won’t be something you need to rely on.
On the right is an example of a cash flow statement showing the cash inflow and outflows.
Ways to track and improve your cash flow
One way to improve your cash flow is by projecting future incomes and expenses by making a cash flow forecast.
This is done by looking at previous time periods of cash flow and using this to predict and optimise future spending and to capitalise on extra income. By having this cash flow forecast you can make decisions based on what is necessary for the business to grow.
If your business sells products then you will want to manage the amount you buy each month. By analysing customer demands as well as buying products in relation to customer demands or buying in excess and then keeping products for the next time period could help improve cash flow.
Having a cash reserve is also very important, this is essentially an emergency fund if you have unexpected payments or monthly payments have increased more than your budget. Setting aside a fraction of profit and keeping it for these emergencies will be very beneficial.
One separate tip would be to have multiple income sources like investments or even a loan if possible as this will help the cash flow.
In conclusion, cash flow is a key factor in your business’s success, so aiming to have positive cash flow by forecasting future cash flow and keeping an emergency fund is incredibly important. By following these tips you can begin to grow your business with a good cash flow.
For more help on how to analyse your cash flow, feel free to ask a virtual assistant at QPA.
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