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Cash flow is the total of how much money flows into and out of a company over a given period of time. Simply put, it’s the difference between what a company spends and what it earns.
Assessing the amounts, timing, and uncertainty of cash flows is one of the most critical objectives of financial reporting. It is important to understand a company's liquidity, ability to fund operations, and overall financial performance and health.
Thus, if you want to know whether a company is profitable, you will need to look at its cash flow statement.
A positive cash flow means that a company has enough money coming into the company to cover its current financial obligations, invest in the company, return money to investors, cover operating costs, and give itself some extra cash for emergencies. On the contrary, a negative cash flow means that there isn't enough money coming into the firm to cover those needs.
Cash outflows are defined as the amounts of cash flowing out of a company. Operational costs, liabilities, and debt payments are a few examples of cash outflow or money that a company has to pay.
On the other hand, cash inflows are the opposite as they occur when money flows into the company, which can be a result of daily sales, positive investments, and profitable financial activities.
When your cash outflows exceed your cash inflows, this results in negative cash flows, which is not an ideal situation for any organization. Healthy businesses maintain a positive cash flow by ensuring short-term and long-term debts stay within acceptable limits.
Therefore, the earlier you minimize your expenses (cash outflows), the better for your company.
A good way for finance teams to track expenses is by keeping a detailed financial report outlining contributing factors in operations that lead to a negative balance sheet. These may include things like:
To improve your financial statements, increase your actual cash flows and grow your company, you need to maintain an influx of money greater than your outflows.
There are several direct methods to manage business expenses and operating activities, and some of the most common tips include:
To improve your business cash flow you can both increase positive cash flow or minimize negative cash flow.
Below is a list of financial tactics you can implement to improve your business cash flow statements.
Long-term costs may be lower when purchasing property and equipment, but the initial outlay is larger. Therefore, when renting, you can obtain the same equipment at a cheaper price, which could result in lowering your monthly costs, reducing your outflows, and increasing the amount of money available for covering your operations.
If your customers regularly pay you late, consider revising your cash payment terms so they don't put a strain on your cash flow statements.
Remove any possible future payment obstacles and ensure you send invoices promptly so your customers have enough time to review and pay.
Paying on time to your suppliers will help you negotiate better terms with them and benefit from early payment rewards from your financial institution.
To grow, you must charge according to the value you provide. Sometimes this will mean raising your rates or adding fees.
Cash is always king. Use these 6 financial planning tips to ensure a positive cash flow & to incorporate this key strategic mindset into your daily operations.
Are you familiar with the most common cash flow forecasting challenges that startups face today? Use this detailed guide to be prepared for the future.