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What is Cash Flow? And How Should Cash Flow Be Provided?

What is Cash Flow? And How Should Cash Flow Be Provided?

What is Cash Flow?

So what is cash flow? If you have a business, you must have come across the term; “cash flow” from time to time. In this article, we shall discuss in detail what cash flow is, and how it can be regulated to ensure businesses operate smoothly.

What is Meant by Cash Flow?

Over time, a business or an institution may experience an increase or decrease in the money it has. This increase or decrease in terms of money comes from incomes and expenditures the company incurs over a given point of time. This movement of money in and out of the business or institution is usually termed as cash flow.

In any business, a positive cash flow is the most desired outcome. A positive cash flow indicates more money being added to the business’ finances. A company is expected to grow and invest more as long as it experiences a positive cash flow. On the other hand, a negative cash flow means the company spends more money than it has earned. A negative cash flow often results in businesses looking for alternative ways to pay for their investments and bills.

A cash flow statement is an official record that marks any kind of cash or cash equivalent that enters and leaves the business at any point in time. The cash flow statement is also a record of a business’s performance as far as monetary outcomes are concerned. Calculating cash flow refers to the net cash flow over a period of time, usually over three or more months. A significantly large positive cash flow is an indicator of a company doing well. However, in any business, monitoring this cash flow helps in keeping the business run smoothly. It can predict risks your business can face in the long run and helps to avoid them.

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Here are ways you can ensure a healthy cash flow.

Risks Faced by Cash Flow

If you wish to maintain a positive cash flow, here are some fatal risks you need to avoid.

Overspending: So far, overspending is one of the biggest threats to cash flow. Once a business gets big, it’s easy to get carried away and incur unnecessary expenditures. While investing more to grow the business sounds tempting, overspending can drastically reduce your cash flow. A reduced or negative cash flow can severely damage your business in the long run. Avoiding unnecessary costs like expensive office decor can minimize your spending problems.

Excessive stock: High demand for a product can be tempting enough to invest in. Yet, you should keep in mind that the demand for a product changes periodically. So, if the stocks you invested in loses too much of their value in the future, it’s not the best thing to invest in. Instead, you can be reasonable with your investments. This can help you maintain your cash flow so it doesn’t affect you adversely.

Payment terms: Avoiding long payment terms is a good way to boost your cash flow. Long stretches of payments can burn a hole through your pocket, keeping you from investing in more meaningful things. Long payment terms can harm your cash flow, especially when the business incomes are low.

Now that you know what to avoid keeping your cash flow in check, let us discuss how the cash flow can be increased.

Cash Flow Statements

We have already discussed the importance of cash flow statements. Cash flow statements not only serve as official records of incomes and expenditures of a business. They are also helpful in predicting ways in which a business can generate revenues. Information on how a business generates revenues can have great value in planning a business. They also help in strategic investments that can ensure a positive cash flow in the long run.

A cash flow statement also keeps a track of your expenditures, and upcoming expenses. So it ensures you can pay your management costs and other bills. If your business is comparatively new, a cash flow statement can effectively suggest if your business is going to need alternate modes of payment.

The cash flow statement also shows the impacts of cash flow on the overall business and how any kind of transaction interacts with your investment values. It also can be used to calculate the “net cash balance.”

Managing Your Cash Flow Statement

Old or new, your business should maintain a cash flow statement to operate, invest, and for financial planning – the three relevant categories.

  • The businesses’ net income and increases or decreases in its assets and expenses are recorded in the operating tab,
  • The investing tab records any change in the long-term or fixed assets.
  • Long-term debts and liabilities, along with any change they undergo are reflected in the financing category.

 

Net cash balances can be calculated by taking into account these categories of the cash flow statement.

Generating Cash Flow

While cash flow Statements are effective in helping you manage cash flows better, other strategic approaches can ensure a positive cash flow into your business. As a positive cash flow is the most desired outcome in a business, the business management aims towards increasing the cash flow. The various strategic interventions in terms of capital efficiency, operating margin, and revenue growth can boost the cash flow significantly.

Inventory management can raise capital efficiency while streamlining in terms of shipping and overheads can help to cut down management costs. Similarly, a business can effectively boost the cash flow with increased revenue resulting from striking better business deals and encouraging new customers. New products and services and attract new customers, increasing the net revenue.

Thus, cash flow becomes one of the most important regulators of your business and your investments. Hence, understanding and maintaining the cash flow is as important as any other aspect of the business. While a negative cash flow can potentially ruin your business, the impacts of a positive cash flow can be rewarding and long-lasting. Hopefully, this article will help you maintain and your increase cash flow.

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