How Important Is Cash Flow When Running a Small Business?
Cash flow is basically the movement (or circulation) of cash from sources that generate it, into and out of your company. A positive cash flow indicates that companies have more money coming into their bank than they are spending. A negative cash flow suggests that there is more money coming out than coming in. Thus, cash flow control is essential to any company and in particular to any small or medium sized business which has a significant amount of sales.
Cash flow is a major factor in determining a company’s credit rating because it takes into account a company’s ability to pay its bills and repay its loans. This in turn depends on how much money is outstanding in the form of accounts receivable from customers. All of this needs to be monitored on a regular basis so that creditors and investors can assess the overall health of your company and whether or not it is worth investing in.
The main factor that determines cash flow is Accounts Receivable. It is, essentially, the sum of all payments you have made to customers for their goods and services plus any amount you have received in advance for credit terms. In other words, it is your company’s version of good credit. If your customer accounts receivables are significantly higher than the amount of money you have in the bank, then it is important to contact them and arrange for credit terms. Most accounts receivable balances will settle as a result of a company entering into a credit agreement, sometimes over time.
Another major factor in determining cash flow is the level of income you are generating. This is calculated by subtracting the sales of items sold from the total amount of expenses incurred in producing those sales. In order to have a positive cash flow, your expenses must exceed your sales income – this is known as your EBIT, or Excess Earnings. Positive EBIT means you are profiting from your customers, as opposed to losing money.
Managing cash flow efficiently is essential for a small business – the better your small business’s cash flow forecast, the more efficiently you can plan future purchases and sales. This in turn will increase your chances of success. There are several tools available to help you with your cash flow forecasting and management. Using a combination of these tools will maximize your ability to manage and predict your bottom line. Here are some of the things you can do to improve your cash flow forecasts:
You should keep in mind that a cash flow forecast is only as accurate as the data you are using to generate it. Use a spreadsheet or some other advanced tools to generate your estimates and use them to make critical decisions about your business. By doing so, you will have a much better idea about how much money you can expect to bring in over a given time. The bottom line is that by managing your cash flow, you can greatly increase the profitability of your small business. This, in turn, will make it easier for you to pay all of your bills as well as save money for other future goals.