Cash flow is the amount of money that is coming in and going out of the business. Generally, cash flows two ways: inflows through the sale of goods and services and outflows through costs such as materials or labor. The difference between cash inflow and outflow is the net cash flow. This net cash flow can be positive if more money is coming in than going out. It can be negative if more cash is going out than coming in. Naturally, a positive cash flow is preferred because it means that the business is running smoothly and allows for the possibility of new investments and company growth.
The “Cash is King” phrase is used to denote that cash is more valuable than any other type of investment due to its stable buying power. When the price of securities and the market are high, it is recommended to build up the cash you have as you wait for a break in the market to begin investing. Although though the presence of a lot of cash is a positive sign, it is even more important to have a positive cash flow since that can offer further flexibility in a business.
Having cash allows a business to operate. As businesses grow, they set aside sufficient funds to cover bills and expenses. The problem starts when credit is involved in problem starts when credit is involved in payment, whether it be with customers or vendors. Suddenly, cash flow is limited, and not as much money will be moving into the business.
Benefits of a Positive Cash Flow
Make sure that the business accurately writes up accounting records in a timely manner. It will allow the business to find out what money is unpaid to vendors and what money is owed from customers. It will also provide the basis for a cash flow forecast that lists current known commitments and monthly expenses. Then the business can write in predictions of future receipts, regular sales, and potential purchases more accurately.
This will help with growth as a business can clearly consider what it wants to invest in, and most importantly, if they have the excess cash flow to allocate into future ventures. It will also allow a business to be more flexible in their buying power. A cash flow can give a business the confidence to make unplanned, necessary purchases without having to wait for more money. For more information on how you can know exactly where you stand month after month click here.