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Any successful business needs an accountant. The complex world of accounting isn’t to be entered into lightly. Those who have a passion for numbers are often times accountants, and we are thankful for them. 

While having an accountant for your business is important, it is equally as important to know the different financial aspects of your business. Most business owners just want to know the bottom line and if they are profitable. But this can give business owners a false sense of security and hope that their business is doing well. 

Even though a business can be highly profitable and growing year after year, there is still a significant risk that the business could implode right under their noses due to this one important factor that most business owners overlook. 

Cash Flow. 

Cash flow is an expression that you have probably used in your business or have heard the term coined in conversation, “our cash flow is good’ or “we need to improve our cash flow” but do you really know what that term means? 

There is only one main use for cash flow in a business: to invest in growth. Growth is a key factor to maintain the success of your business. 

Knowing your cash flow ratios is key in business and your knowledge of it will impress other executives. If you are looking for investors, a bank loan, or any sort of outside loans your cash flow will be a key factor in deciding if you can handle the loan. 

Appointing someone in your business who is good with money and understands the importance of the role is key for successful cash flow management. 

How do you calculate cashflow? 

You calculate cash flow by stating the difference in the amount of cash available at the beginning of a period (opening balance) and the amount at the end of that period (closing balance). It’s positive if the closing balance is higher than the opening balance, otherwise it’s negative.

To calculate your operating cash flow: add net income + depreciation + amortization together with income from other sources or charges, then subtract the net increase in working capital (current assets - current liabilities).

It can be a daunting experience at first, but knowing this formula is the key to keeping your business positive.

What is good cash flow?

A healthy business should generate positive cash flow from operating activities and should be able to grow or sustain it over time. Positive cash flow is achieved through careful cash management. However, keep in mind, positive cash flow does not necessarily equal profitability.

What does it mean to have a negative cash flow? 

Negative cash flow does not necessarily mean your business is running at a loss. It may be due to a mismatch of expenses and income; in other words, a timing issue. A chronic mismatch, however, may indicate ineffective credit management, leakage of funds through fraud, or actual losses due to expenses being higher than revenue.

This is why it is important to do monthly cash flow statements to ensure that the business is going to be profitable at the end of the year. Certain times during the year could have negative cash flow due to a slower season or unexpected expenses. Don’t let negative cash flow discourage you or get you down. It can always be built back up. 

What are cash flow ratios?

Cash flow ratios provide easy-to-understand measurements that illustrate how solvent, liquid, and viable a company is. There are many cash flow ratios, each used to assess the health of a business by analyzing its cash flow relative to various factors. You and your accountant can determine which ratios make the most sense to monitor depending on the circumstances of your business. Select perhaps three to five and review them monthly, along with your other financial reports, to have a keener understanding of the status of your cash flow and whether you may be heading for trouble.

Only your cash and debt balances are factual and can paint a picture of which path your business is taking. It cannot be stressed enough to keep a close eye and understand fully the importance of monitoring cash flow for your business. 

Hello! I’m Constance Moonzwe. Subscribe for my business tips and my entrepreneurial journey. Learn more about me at www.MeetConstance.com

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