Posted by Tiffany Gaskin

Understanding Cash flow & Its Importance to Small Business

Understanding Cash flow & Its Importance to Small Business

All businesses, no matter the size, need to understand the effect of cash flow. It is a pointer to your company's health and one of the most decisive metrics when understanding finance. 

Cash flow refers to the movement of cash in and out of business. The cash here refers to the physical money and its equivalent.

 

Liquid Assets

These are cash and its equivalents that flow from one point to another without resistance. Such assets can be used for purchase without restriction on time. Your cash flow involves cash, funds in saving and checking accounts, and money market accounts

Non-Liquid assets 

While non-liquid assets have value, it is not easy accessing them. No money outside (with customers or vendors as debt) can be counted as part of your cash flow. Physical assets such as real estate or a photocopier are not part of your cash flow. You cannot spend your receivables until your customers pay. Physical assets must be sold to get them to cash. 

One cannot classify items like vehicles and real estate as liquids since the sales process is complicated. There could be an escrow process with real estate, and you need registration and title transfers with vehicles.

 

Why You Need to Keep Track of Your Cash Flow 

  1. Guide you towards better Plans 

An accurate cash flow statement opens your eyes to the exact funds you have at a given time. It is essential as you need accurate information to back up any plan or decision you want to take. Not managing your cash flow properly might subject you to bad decisions, which might endanger your business. 

While it is possible to assume your business is in a strong position, a cash flow statement will reveal its health at a specific time. It might be due to various reasons, and an updated cash flow statement will guide your purchase decision at such time. 

  1. Know Where Your Money is Going 

With perfect management of your cash flow, you will know exactly where your funds are going. This, at times, might not be on a profit and loss statement. You need to be able to pinpoint where your money goes and why. 

You might have access to expenditures clearly, making it essential to manage your cash flow effectively. It can also open your eyes to business areas where you need to cut costs. 

  1. Guide Business Relationships 

If there is a problem with your cash flow, funds to pay your suppliers might not be available. This can be detrimental to the business as there is the possibility of harming the business relationship and damaging your reputation. 

As a result, you need to have a payment schedule to ensure your finances are available for payment to suppliers. With advanced planning, you can avoid multiple invoices without the funds to take care of them. 

  1. Make Your Expansion Timely

Every business desires growth and expansion. It is your ticket to new markets, more staff and even better, more revenue. Expansion, however, needs to be timely as wrong expansion or doing expansion in a bad way can trigger issues in the long run. 

Expansion needs money, lots of money. Think about the cost of renting or acquiring a new building, hiring and paying more staff, getting other essential business accessories, and every important thing you need to spend on before you see a return on such investment. The absence of funds available to match such growth will make you run into a problem. With the proper management of your cash flow, you will know the best time for expansion. 


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Tiffany Gaskin
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