Neglecting to track the money that’s flowing in and out is a disastrous mistake
There’s really no point in running a business if you have no intention of knowing exactly how much money goes and out and how much goes in. That’s called cash flow. It is one of the most unfailing indicators of a business’s health. It gives you a picture of your survival in the short term, and through cash flow projections, you can see whether or not you’ll be able to sustain money for long-term sustainable growth.
Business owners who don’t keep a close eye on their finances every day are at a major disadvantage. It’s a big mistake to not understand whether or not your business is cash flow negative, or if you’re getting dangerously close.
Here’s how cash flows in and out of your business:
- Cash is flowing in when customers or clients are buying your products or services. Even when customers don’t pay at the time of purchase, there is still cash flow coming from collections of accounts receivable.
- Cash is flowing out of your business when you make payments or incur expenses such as rent, also when you make payments for loans or for taxes, as well as other accounts payable.
Knowing your cash flow translates to sound business plans and smarter decisions
The beauty of an accurate cash flow statement is that you’ll know the precise amount of funds you have accessible at any given time. What makes this important is that when you make plans and decisions as a business owner, you have accurate information that you can use. Conversely, if there are things that you don’t track in your cash flow, you could be making bad decisions that can permanently compromise your business.
Sometimes it may seem like your business is in a solid state, but there’s really no better way to confirm that than to look at your cash flow statement. It could show that there isn’t much money flowing into the business in a certain month, and one reason could be because you haven’t issued invoices to clients or followed up on collections. An updated cash flow statement will tell you when not to make any significant purchases or when you can comfortably spend money.
How well do you know your numbers?
Cash flow helps you understand where the money is going and why it’s there
Not only will cash flow tell you the numbers, it will also tell you where those numbers go and for what reason. It’s very useful for a business owner to gain a better understanding of where the business is currently spending money. Why are you allocating that amount? What is the benefit? Have we been seeing that benefit? Is there any way to remove or reallocate the funds?
Every business owner knows that it isn’t always easy to see expenses on paper, and that’s the reason why it’s so crucial to manage your cash flow effectively. Getting that insight might help you identify areas of the business that you can save money from, or areas that actually need more money.
Cash flow management can save business relationships from falling apart
Your relationship with suppliers depends on your ability to maintain a good payment history. Unexpected cash flow problems could mean you may not have the funds available to pay them on time, and this could potentially harm the business relationship you have with them, not to mention your overall reputation as a business.
You won’t be having this problem if you know how to effectively track and manage your cash flow, as it would give you a picture of your financial health and whether or not you need to make adjustments in advance to avoid problems with business partners.
Your potential for growth depends of your cash flow, among other things
Growing and expanding your business is exciting. It means new markets, new staff members and more revenue. But, a word of caution. Expand at the wrong time or in the wrong way and you’re more likely to have issues in the long-term.
One of the worst things a business owner can do is to decide to expand and grow his business at the wrong time. How would you know when it’s the right time? Well, business growth necessitates a lot of cash. When you expand, you purchase additional stock, you rent more space, you hire more employees and sometimes it even requires you to acquire expensive technology for the first time. That’s a lot of money flowing out before any money starts flowing in. If you rush into expanding without having sufficient funds to match your growth, then expect a lot of problems. Only effective and accurate cash flow management will guide you on whether or not the time is right for business growth.
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