Cash flow is basically the money count of a business. It is about measuring the flow of money in and out of a business. In other words, Cash flow is the lifeblood of any business. In order to sustain and grow, businesses should have more inflows than outflows at a given point in time.
Although Cash flow has various meanings in property, investing and accounting, in accounting, it is simply a report that details the past physical movement of cash into and out of an enterprise. It can also mean a budget that anticipates the closing cash balances for future accounting periods of a business on a Cash Flow Statement.
One of three key reporting tools used to provide decision makers with useful information about the financial position of a business is the Cash Flow Statement. The other two reports are the Income Statement and Balance Sheet.
Each of these three reports provides unique financial information:
- Balance Sheet – The Balance Sheet primarily reports the financial strength of a business at a given period in time. i.e. Its Net Worth (Equity). It includes the value of the Assets and Liabilities.
- Income Statement – This is a detailed report of the revenues and expenses of the business. It is represented as one line summary in the Equity section of the Balance Sheet – i.e. Current Earnings. The Income Statement shows the financial performance of the business for a past time period and its profitability.
- Cash Flow Statement – The Cash Flow Statement is a summary of income into and out of the business during a set period. The previous period’s Balance Sheet is needed to accurately complete a Cash Flow Statement.
To keep a business’ cash flow alive, here are a number of things to do:
1. Prompt Invoicing:
As soon as a job/project/work is completed, it should be invoiced within 24 hours. It is bad for the cash flow when invoices are raised late. Instead of delaying invoicing by post and postage, make use of emails.
2. Big Sales:
Usually, when a customer is billed on a big sale, that is more cost involved to your company. They ask the payment in advance to make sure you have enough cash for the purchase of the inventory and pay the staff at the same time.
The best way to manage cash flow is by budgeting your income and expenses. Always have an estimate of the cost involved in the purchases of raw materials, salary payments and other fixed cost of the business.
4. Credit rating:
Like the company, the business owner should have good credit rating. Entrepreneurs should have a second B in case of a fund shortfall. Bank overdrafts can come in handy for survival purposes.
5. Debt Collection:
You business should have policies for debt collection and have a payment default clause for customers. Call and send email reminders for the due payments to keep your cash flow alive.
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