One of the most important elements of a successful business is healthy cash flow. Without this, any business will struggle to operate properly. Cash flow is different from income and profits. It’s not about the quantity of your income, but the quality of your income and how well this is managed compared to your business expenses.
This guide covers everything you need to know about cash flow and how to improve it.
What is Cash Flow?
Cash flow refers to the amount of cash, or liquid assets, that move in and out of a business. A business with a positive cash flow has more cash coming in than it has cash going out. This means the business can cover its operating expenses and cover additional activities, like reinvesting in the business or putting away cash for the future. A business with a negative cash flow means the business’s cash, or liquid assets, is decreasing compared to the cash going out.
Net Income vs. Net Cash Flow
Cash flow refers to the actual cash or cash equivalents, a business has available. Net income refers to the total amount of income a company generates. This includes all accounts receivables, such as unpaid invoices. So cash flow does not refer to the amount of money a business generates. Instead, it refers to the liquid assets a company has – which means assets that can be easily converted into cash. A company could have a lot of income which makes it profitable, but if this income is not liquid, the company could have a cash flow problem. Managing cash flow is not about making a business generate more money. Instead, it’s about making sure the money available is greater than the business’s current expenses. It’s also important to understand working capital, which refers to all of the business’s current assets, including cash. A business with bad cash flow could balance the issue out with enough working capital available.
Improving Cash Flow
New and growing businesses often face a cash flow problem, where the business needs more money to pay expenses than it’s bringing in over a period of time. This is also referred to as a burn rate issue. Businesses can quickly fix this by adding more working capital, like gaining investment or taking out a loan. However, this doesn’t solve the cash flow problem and could result in even greater cash flow issues further down the line. This is why it’s so important for businesses to carefully manage their spending to keep cash flow positive and burn rate low. Business spending is predictable, so when well-managed, it can help even low-income businesses achieve positive cash flow.
The best way to improve cash flow is to use bookkeeping software to help you gain more control over your business spending. All you need is a network connection, and you can use mobile bookkeeping solutions to help your business improve cash flow. Gaining a positive cash flow is something every business should be focused on achieving. Getting it right will make managing your business far less stressful and more rewarding.
Read Also: How To Automate Your Payroll Processes
