Most people believe that the most important part of their company’s financial health is its profits. While it is one of the more important factors, it isn’t the only one and it also isn’t the one you should be worrying about. Keep your cash flowing smoothly and your profits will take care of themselves.
The Importance of Positive Cash Flow
Your cash flow is what your business relies on to stay fluid. You need cash coming in so that you can pay your bills and other financial obligations every month. When your cash flow is good, your profits will continue to rise. If your cash flow is slow, your profits will drop, right along with your credit rating.
Positive Cash Flow vs Revenue
The cash flow of your business is the money you use on a daily basis. It flows in and out of your business every day, allowing you to keep it running smoothly. Revenue, on the other hand, is only half of your cash flow. Your revenue represents the money that is coming into your business through sales and services.
Cash Flow vs Profit
The profits of your business are the money you have left over after you have paid all of your bills and expenses. It is money that you can use to pay yourself or put back into your business. You can also invest it in different options like stocks or property. Positive cash flow is money you have left over after you have paid all of your operating expenses.
The Benefits of Accurate Cash Flow Statements
Accurate cash flow statements have a few benefits. First, they can show you where the money is coming into your business and where it is going. It can give you insight into areas that may not be cost-effective. Correcting problems with cash flow will make your company more efficient and also increase your profit margins. When you compare cash flow statements over the course of one or two years, you will have an accurate depiction of your company’s financial health.
Why Is Timing Important?
The key with cash flow statements is timing. Monitoring your cash flow statements will tell you how much time you have between when you spend money and when it comes back into the company. If the lapse of time is too long, your cash flow will be slow and may hurt your company’s financial future. The key is to shorten the amount of time between spending and receiving money.
Cash Flow Forecasts
Cash flow forecasts allow you to identify peak sales periods when your cash flow is on the money. It will also show you when your slow times are. This allows you an opportunity to balance these times so that you can put money aside during peak times and have it available for the periods when cash flow is slow.
Sharing Your Information
Share your cash flow information with people on your various teams. When everyone has the right information, it can make buying and selling your products and services much more lucrative. Sharing the information and working together will keep your cash flowing steadily all year long. Understanding your cash flow is one of the most essential tasks of running a business. For as hard as you try, there may be forecasts that indicate a potential shutdown. When this is in your future, apply for a working capital loan before you need it. When your business is good, you are lower risk and more likely to get the funding you need. Be proactive and think ahead to the future!