How Cash Flow Works To Keep The Business Afloat?

Cash flow is the money that is moving or flowing in and out of business in a specific period. Although many people take it to flow just one way (out of business), it flows both the ways.

• Cash comes in from the clients or customers who buy products or services. If clients don’t make payments at the time of purchase, the cash expected to flow in is accounts receivable.

• Cash goes out of the business in the form of payments to vendors, rents, monthly loan payments, taxes, and accounts receivables.

Cash VS Real Cash

For some business owners, like retailers and restaurant owners, cash is real cash – paper money (currency). A business owner takes money from the customers in cash and pays its creditors in cash. Cash business faces some issues while keeping track of cash flow since they generally don’t track income unless invoices or other paperwork are involved.

Why Is Cash Flow Important?

One of the biggest reasons why most businesses fail is lack of cash. Inadequate cash reserves is a top reason why some start-ups don’t succeed. The situation is called running out of money, which will eventually lead to the business shut before anything else.

• Start-ups: when a business newly starts operation, dealing with cash flow issues is most complex. The business owner has many expenses, and the money goes out faster than anything else. The business may have no sales or a few customers who are paying it. Therefore, the business owner may require temporary sources of cash, like a line of credit. It will help in maintaining positive cash flow.

• Seasonal Businesses: cash flow is important for seasonal businesses – the businesses that have large fluctuations at some particular time of the year, for example, holiday businesses, winter businesses, etc. In this type of business, managing cash flow is a bit tricky but can be done.

• Cash VS Profit: many times, a business make profits but have no cash. Can this happen? Yes, certainly. Significantly, profit is an accounting term, while cash is the actual money in the business. A business may make a profit and have assets in terms of accounts receivables (money owed to the business owner by customers). But if this owed money is not collected, then the business owner won’t have cash. The accounting system may show a difference between profits and cash. If the business runs on accrual accounting, it recognises income as the invoice is sent, regardless the customer has paid the money or not. In this case, the accounts will show a profit, but there will be no cash.

How to Analyse Cash Flow?

A cash flow report is the best way to keep track of cash flow in the business. A cash flow statement looks at the chances to cash (flowing in and out) from different activities. It keeps into account the increase and decrease in cash. For example:

• What happens when a computer is bought with cash?
• What happens when a business pays its bills in cash?
• What happens when a business receives cash from purchase supplies?
• What happens when the cash is paid to an employee or contractor?

Depending on the requirement, a business can maintain cash flow daily or weekly. The business owner can also determine:

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• Total sales at the end of the month.
• All the purchases whose payment is not yet done.

Notably, if the monthly cash shortage continues for a couple of months, it will become hard for the business owner to come out of the situation.

What is Free Cash Flow?

Most businesses take the flow of cash in and out only from the business operations. But there are two other options for flow of cash. These options are used in the cash flow analysis method called Free Cash Flow. In addition to cash from operations, it also includes numerous types of cash flow:

• Investment: the business can spend cash on investment in assets. Or it may also earn cash by selling asset used in the business. For example, a business can bring in more cash by selling a vehicle or machinery for that matter.

• Financing: a business can raise cash or funds through selling shares of stock. Cash outflow can be because of paying to investors, for example, dividends.

Temporary Solutions for Cash Flow

Many businesses get temporary help for cash flow by availing loans- working capital loan, particularly. A business loan works in a way that it provides funds to the business owner at the time of need. He gets funds in his account that he can withdraw when in need of cash. He makes payment for it in easy monthly instalments along with interest cost.

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