Wealth Building

12 Cash Flow Facts And Why They Are So Important6 min read

Reading Time: 4 minutes There is no guarantee that your business will grow with increasing sales and profits. Cash flows are the key to sustainable growth. Here’s how you ensure success.

September 12, 2020 4 min read
Cash Flow Facts

12 Cash Flow Facts And Why They Are So Important6 min read

Reading Time: 4 minutes

Not receiving a predictable paycheck, good or bad, is worrisome. It means you haven’t been paying enough attention. Cash flows change every day. The more aware you are of these changes, the more you will be able to control your business. Not only can you utilize cash better with sufficient cash flow management, but you can also generate additional funds from existing sources.

It helps you spot any discrepancies in your books. Cash flows are the lifeblood of your business. You get to detect and prevent any flaws. So paying close attention to your cash flow is imperative for a successful business.

What is Cash Flow?

Cash flow is the amount of money coming in and going out of your business. It refers to the movement of money resulting from the transactions of your company. Technically, it is the culmination of accounts receivable and accounts payable. Cash flow doesn’t focus on sales or revenue only.

It follows all the cash that is available to your business from operations, investments and other financial transactions. It takes in all the sources of income and channels of payment. You need to ensure you have enough cash in order to make investments, to pay for cash and to borrow funds for a project.

After you calculate the inflows and outflows and notice your cash flow is positive, good on you. Many businesses keep their cash flow negatives on purpose so if it’s a part of your plan, just make sure nothing deviates! The detailed map for the coming and going of your business’ income is broken down into three sections as followed.

1. Operating Activities

This is the money earned or spent on operational activities. It is the main area of concern when it comes to measuring cash flow performance. A business uses the cash they receive from customers to make payments to the suppliers. Not all sales generate cash because expenses may be incurred on credit too. In this case, you can predict the levels of non-cash sales or uncollected cash from sales. If you’re unable to require the money, you’ll be affecting the cash flow performance.

2. Investing Activities

It is the money spent on assets or equipment. This also includes the cash earned from investments. A business needs to make long-term capital investments to grow.

This means putting cash in marketable securities that may result in positive returns. If improperly planned, not only will you end up in a poor cash flow performance but also lowered cash inflow in the long run.

3. Financing Activities

This highlights the money distributed to owners or stockholders and also includes the funds received from financing sources. If you can’t secure financing from banks or other creditors, your business will receive reduced cash inflows.

Why Does Cash Flow Matter?

Your cash flow statement helps you pinpoint information that helps you run your business more effectively. Reviewing this will help you narrow down any missing information that might impact the health of your business.

1. Determines the Attractiveness of Your Business

Investors or lenders invest in businesses that continuously generate plenty of cash. So if your cash flow statement shows that they will get their share of dividends, they will gravitate towards your company. Banks also pay attention to the financing section. They get to see how you determined previous loan repayments. If you repay your loans in due time, they will help you if you ever require a loan again.

2. Helps Make Better Use of Your Cash

You can see if you have excess cash on hand through cash flow statements. This money can then be used to purchase assets or equipment that might profit your business more. Storing costs are high too. A numerical representation of your inventory can tell you where to cut the carrying costs from. You can improve your cash flow by maintaining appropriate inventory levels too.

3. Makes Your Company Time-Appropriate

Your customers may take too much time to pay. The cash flow statement can help you shorten payment cycles and clear out any overdue payments. You can offer discounts to customers who pay early.

It’s also important to conserve cash by waiting as much as possible to pay without incurring any penalties. Make sure you negotiate for the most favorable payment terms. Make use of the cash flow statements and build a sustainable business.

How Do You Manage a Healthy Cash Flow?

Paying close attention to your cash flows will detect and prevent any potential problems. Here are some practices that will keep your business free of financial troubles.

1. Monitor and Project

You need to regularly keep an eye on the cash flow. You won’t be able to make a proper assessment otherwise. This will also help you make more accurate and relevant projections of future cash flow.

2. Forecast Accurately

Historical figures are important. Customer payment history, industry trends and economic conditions will help you predict a thorough and accurate forecast. Doing this monthly will give you a proper assessment of your company’s performance.

3. Identify and Adapt

The quicker you identify a problem, the easier it will be to fix it. You might have to request some leniency from investors. Or even have to reach out to the bank. They’ll be more receptive to change if you ask early.

4. Carry Backup Files and Plans

Always have an emergency backup plan for both your data and cash flows. You never know when you’re met with a crisis. Reserve some cash. Get an extra hard drive. Little things like these will give you a peace of mind.

5. Grow Mindfully

Growing isn’t the agenda. Growing sustainably is. A large company comes with a long list of expenses. You’d need to spend more on raw materials or workers. Your business might end up with a shortage of cash if improperly expanded.

Why We Recommend These Books

Cash Flow Dojo: Build Your Home on Multiple Streams of Income by Martin Saenz

Cash Flow Dojo paves the way to financial freedom by helping you walk through multiple income streams. Martin gets upfront and personal while discussing how to build a custom road map for you. After all, “if you don’t have a plan, you are working on someone else’s plan.” The author not only helps you get the right attitude for a successful venture but also guides with ways on how to attain true freedom.

She Markets, A Guide for Women Entrepreneurs: Five Simple Steps to Attract More Clients, Make More Money, and Have More Impact by Cynthia Trevino

Women entrepreneurs are on the rise but many fail to jumpstart their businesses for really silly reasons. Cynthia Trevino believes that a business doesn’t sustain from marketing efforts only. An entrepreneur should learn how to interact and retain clients. The book lures you in with powerful tools and legitimate stories that will help you get a step closer to success.

Bottom Line

Creating your cash flow budgets and predicting your cash forecasts may be intimidating at first but it becomes more manageable over time. Get familiar with the process. Master it. Then reap the success that follows.