The Importance Of Understanding Your Business’s Cash Flow

Understanding the finances of your business is a must. You want to make sure that you’re able to keep the lights turned on and the suppliers paid, and if you intend to grow the business, you want to know that you’re able to raise the cash to do so. As such, you have to understand not just what’s in your bank, but your cash flow as well. Here, we’re going to look at the elements of cash flow that you may need to understand a bit better.

Your operating flow

First of all, start with how much money your business is making from its core operations. Everything that is made from sales and routine business operations should be counted here, and should all be tied up in keeping the business functional and sustainable, above all else.

Your financing

Most businesses have some form of funding or financing to help them get up and running. While you may have spent much of your financing on setting up the business as it is now, you may have some funds left over from investors or creditors, whether they are loans, dividends, or otherwise. Track both how much of your financing you have left, as well as how much you have to pay back.

Cash inflows

Your cash inflows could count everything that comes into the business. This includes your operating flow, any sales revenue, loans, as well as anything such as investment returns if you are investing some money in the business’s name. You want to be distinct in setting apart the different sources of funds coming into the business, of course, and it’s important to also track any money that you are owed, such as invoices that have yet to be paid by your clients. Is accounts receivable an asset or liability? Not finding the answer could see you sitting on money that you could be using.

Cash outflows

Just as you might be sitting on the money you don’t have, you can also be spending money that isn’t yours. You need to track all cash outflows, including expenses, payments, salaries, rent, utilities, loan repayments, and more. Just as you should track your accounts receivable, you should also track your accounts payable, to make sure that you’re not missing any payments you should be making on what you already owe.

Available cash flow

Your cash flow should be tracking all of the money moving in and out of the business, as well as money owed to and by the business. However, you might also want to keep an eye on funds that will be potentially available to the business. This can include lines of credit you might be able to open, as well as money you could get by selling assets in the business. Knowing where to find extra funds for your business can help you avoid having to make big cuts in a financially tough situation.

Your business’s cash flow, as well as its projected and potential cash flow, is a much more comprehensive measurement of its financial health than just looking at the bank balance alone. Make sure that you’re tracking it.