What you need to know about cash flow
Cash flow is an integral part of your business finances and will actually be the lifeblood of your business. This makes it extremely crucial that you take the time to learn all you can about cash flow and how it affects your business finances. If you fail to understand how cash flow affects your business finances then your business will have a hard time paying its bills, making payroll, and having enough money to stay up and running. However, the good news is that there are fairly simply guidelines that will help you manage your cash flow and keep your business finances healthy. Here is what you need to know about cash flow-
- Understand what cash is coming in-As a business owner you should have a very clear idea of exactly where your cash is coming in from. Keep in mind that this is the money that will allow you to pay your costs and make your payroll. Most cash inflow from businesses comes from-
1. Accounts receivables-This is the payment that your business will receive from the sales of products and services.
2. Interest-This is interest that is paid on business accounts that are either savings or investment accounts.
3. Shareholders-The people who invest in your business will pay investment costs that can be added to your cash flow.
As a business owner you need to have a clear idea of how much cash is coming into your business and where it is being spent. If you are vigilant in monitoring your cash inflow then you will know if you have enough money to pay your business costs. If your cash inflow starts to go down then it is time to get your marketing department involved. These are the people who will be responsible for helping to boost sales and the resulting cash inflow. It is only through a healthy cash inflow that your business will be able to realize profit.
- Understand where your cash is going out-Just like you need know where and how much cash is coming in you also need to be equally aware of where your cash is going. If your business is spending too much you will soon find that it is a struggle to keep your doors open. While every business will have its own unique costs you should be aware of some of these common business costs and be monitoring them in order to insure that you are not spending too much. Common cash outflows for most businesses include:
1. Purchase of all materials-Whether you are purchasing raw materials or finished goods anything that has to be bought to run your business falls under this category.
2. Payroll-This is all of the costs of paying the people who work for you.
3. Rent/mortgages-This is usually the largest single costs for most businesses. If this cost is to much you will need to take steps to reduce it.
4. Loan repayments-Most businesses have some amount of debt financing that take up a significant portion of the cash outflow.
5. Credit cards-This category includes any lines of credit that have been used to finance the business operations.
6. Income taxes-This can also be a significant amount of cash outflow.
7. Purchase of fixed assets such as your computers and office supplies-This is any type of expense that is needed to run the business on a day to day basis.
Finally, it is important that business owners do not just make enough cash inflow to pay their bills but also generate enough cash flow for an emergency fund. Having an emergency fund can mean the difference between being able to deal with problems that come up and having to struggle financially.