4 Aspects of Cash Flow Management You Need To Know

What is cash flow? Simply put, it’s the net amount of money that moves into and out of a company at any given time. Most businesses do their tracking of cash flow on a monthly basis. Understanding your cash flow gives you a clear picture of the liquidity, flexibility, and financial performance of your enterprise. It’s crucial to have positive cash flow as much as possible. Here are several aspects to keep in mind about cash flow as you plan for success. 

1. The Importance of a Positive Cash Flow

For your business to operate effectively, you need money in the bank. You have to purchase inventory or raw materials, pay employees, and cover all of your operating expenses. To make this happen, you draw on the money you’ve received from sales or receivables or dip into working capital. Timing sales relative to expenses is where potential problems come in. Even if your long-term trajectory is a strong one, running out of money could jeopardize the viability of your business. Positive cash flow is crucial for survival. 

2. The Difference Between Cash Flow and Profitability

Cash flow and profitability are related but different. In fact, it’s possible to have a positive cash flow without being profitable. Profitability focuses on the big picture. It’s the amount of money you have left once you’ve paid all your expenses. You might have turned a profit over a fiscal year, yet dealt with several phases of negative cash flow.

3. Why Good Cash Flow Management Matters

If you manage your cash flow effectively, you’ll get much more accurate information about the health of your company. Budgets are rough estimates. On the other hand, cash flow projections tell you what’s actually happening — in detail. Then you can prepare more wisely for the future. Good cash flow management helps you predict when the lean times will come. Also, creditors feel more confident lending to businesses with positive cash flow. 

4. Tips On Managing Your Cash Flow

While resources like the SBA (Small Business Administration) offer comprehensive guides to managing cash flow, here are a few commonsense suggestions. First, maintain a cushion of cash at all times. Second, set up systems to get paid faster. Third, manage your expenses and taxes closely. Also, consider alternate revenue sources if you’re a seasonal business. 

Maintaining positive cash flow is imperative for your business to thrive. Take this information into account as you strategize.