Managing cash flow is strategic for the success of a business. It is so important that it is a great determinant of business success or failure.
Cash flow is basically the money going in and coming out of a business. Cash inflow is the money coming into the business gotten from the sales of products and services.
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Money made from sources like financing and investing also falls into the category of cash inflow. Cash outflow is money going out of a business; this includes bills, salaries, and dividends made to shareholders.
Understanding the basics of inflow and outflow is strategic for this topic, to help us understand how the idea of cash flow works.
There are three types of cash flow.
Operating cash flow will show if the money coming in will be enough to cater for operational expenses like bill payments and other expenses.
Operational expenses will show if you can conveniently cover the operational costs of the business on your own or if there will be a need for external funding or financing.
Investing cash flow involves money invested in areas like business development and research. It is good for money to consistently come in and go out, but investment in cash flow is significant too.
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Financing cash flow depends on the business funding options a business has. When the financing cash flow of a business is positive, it shows you are investing well in the business.
On the other hand, however, it may also mean your business is completely relying on external funding rather than the sales from the business.
A healthy cash flow in a business means there is sufficient cash flow for the business to consistently run day-to-day transactions.These day-to-day expenses include rent, utilities, inventories, and payroll.
In à sitaution where cash flow is not up to date, the running of daily expenses will be affected, and this will mean late payments, inability to meet up with running expenses.
Here are things that cause cash flow problems in a business: when customers fail to make payments on time, cash flow in the business is affected. By extension, bills and restocking will also not happen on time.
Excessive costs can also affect a business. When a business spends too much on rent, utility bills, and the like, then it would be affected at some point, and cash flow would become a problem, even leading to financial instability sometimes.
Certainly, when there is a decline in the flow of cash for whatever reason, then cash flow will be affected. When sales have been reduced, the level of cash flow will be affected too.
Economic downtimes can affect a business and limit the flow of cash. Individuals who do not make as much as they used to will not also spend as much as they used to, and business is affected this way.
Steady cash flow can be achieved if you encourage your customers to pay earlier. Sell off old stocks to create space for others to get displayed and to enhance cash flow in the process.