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Cash Flow Management 101: How Cash Flow Works to Keep Your Business Afloat


Did you know that 82% of businesses fail because of inconsistent or insufficient cash flow? Cash flow issues tend to come from managing receivables, managing payments, employee management, and getting capital. Resolving cash flow problems is all about understanding the concept.

Read our guide on cash flow management to learn how to keep a business afloat.

What Is Cash Flow?

Cash flow is moving, aka flowing, money within a business. It may seem like cash is only going out of the business, but it flows both ways. Cash flow is measured monthly.

Cash flow relates to profit and loss. Cash comes in from customers who buy services or products from a business. Companies may get paid through collections if customers don't pay at the time of service.

When cash goes out of the business, it is because of expenses and payments. Common expenses businesses must pay for include mortgage or rent, taxes, and accounts payable. If loans were borrowed to open the business, they also need to be repeated monthly.

When more money is coming in than going out, a business has a positive cash flow. This is good news because a business can always pay its bills. When more cash is going out than in, a business may run into overdraft issues.

Cash or Real Cash?

When you get into cash flow management, you learn the difference between cash and real cash. Only some companies handle real cash like paper money. Typically, this occurs in restaurants and few retailers.

Real cash can be used to pay bills. These businesses have a harder time keeping track of their cash flow. They don't track income that doesn't come with paperwork like invoices.

Cash businesses are at a higher risk of getting audited by the IRS. This is because it is easy to hide and not report cash income. For other businesses, cash flow refers to the money from customers that is not physical cash.

Cash Flow Importance

Small businesses tend to fail more often because of small business cash flow issues. Without adequate cash reserves, any business is more likely to fail. Without cash flow, a business runs out of money and cannot continue.

Managing cash flow when a business starts is essential. It is more difficult at the beginning which is why businesses must get it right.

Money goes out quicker when starting a business because of all the expenses. A company may not have enough customers and sales right away. Because of this, it is common for businesses to look for temporary cash sources.

One way to get temporary cash is through a line of credit. However, one of the most popular ways to start a business is with a loan.

During the first six months, cash flow is the most crucial. Without enough cash to get through the first six months, the chances of success are low.

Businesses can make a profit without cash. Profit is known as an accounting concept while cash is an amount in a checking account. Although profit cannot pay the bills, assets and accounts receivable can help a business collect what it owes.

Seasonal Business

For a seasonal business, the importance of cash flow is greater. Managing cash flow is possible for seasonal businesses but it is harder.

Cash Flow Management Tips

There are general tips for managing cash flow that can help any business stay afloat. You can control inventory, collect receivables and end unprofitable relationships to avoid a cash flow emergency.

When a business has too much inventory, cash gets tied up. By controlling your inventory, you can estimate how much you actually need in the store.

With a collections schedule, a business can follow up with those who do not pay. Keep a report of this information to stay on track. If customers continue not paying, a business should end the relationship.

Keep Track of Cash Flow

Once you know how cash flow works, you can learn how to keep track of it with a cash flow statement. This is not the only way to keep track of cash flow, but it is the easiest.

A cash flow statement reports the cash a business gets and the cash they pay towards expenses. With this report, businesses can see their cash position every month. Some businesses may find it necessary to keep track of cash flow weekly.

Once the month is up, look at the sales totals and add up purchases that need to be made. The difference is the income for that month. Having a cash flow issue month after months is going to be hard to come back from.

The quickest way to come up with a cash flow analysis is by comparing unpaid purchases to the total sales. If cash flow is negative, the next month, a business will have to spend more cash than you receive.

A business that uses accounting software should have a cash flow statement report readily available. An accountant can also run these numbers. A cash flow statement is the most important business analysis a company can run each month.

Why Your Business Needs Cash Flow Management

Without cash flow management delegating profit and loss, there is no way to succeed. A business should always know its cash flow position at least monthly. By knowing your expected sales and overhead costs, you can forecast your cash flow.


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