Managing cash flow is one of the most important aspects of running a business. Whether you are a start up with a very low income, or a larger business with significant cash reserves, it is important to ensure you have a strong understanding of your businesses finances. By monitoring and managing your cash flow, your business will have the cash reserves it needs, when it needs them the most. In this guide we take a look at the importance of effective cash flow management and how your business can maintain a positive cash flow.
Why is cash flow important to a business?
A cash flow statement is simply a way to see exactly how much cash is available. Even if you operate a large successful business with high profit margins, if your cash flow falters and money runs out temporarily, it can be difficult to pay bills on time. To ensure there is always enough cash available to maintain your usual operating activities, it is important to produce and monitor a detailed cash flow statement.
There are a variety of financial statements, however a cash flow statement details exactly how much money you are owed, how much your business owes and how much cash you have as a reserve in the bank. A healthy cashflow will ensure that your business always has the money available in the bank to pay bills as the arrive.
How do you calculate cash flow for a business?
In its most basic form, your cash flow is the amount of cash paid to your business, minus the cash which is paid out of the business. The result is your cash balance for a particular period of time. If your net income is higher than any outgoings, you will have a positive cash reserve. If your expenses are higher than the figures included in your income statement, you will be unable to pay bills and maintain operating activities, without falling into a negative balance.
How to improve cash flow
Accurate sales forecasting can help protect your business, by helping to predict how much your business will be paid in the coming months. If you have a strong understanding of the market and previous income figures, you can predict any income and outgoings for the business. For example, if sales tend to fall at a certain time of the year, this information can be used to ensure you have enough cash reserved to cover bills during this period.
If your sales forecast shows that you may be facing a drop in income, it is also possible to improve cash flow by implementing effective cost control. It is always important to keep a tight control on spending, however if you know that cash flow may be tight, you should look for savings and weigh up any existing overheads. There may be ways to lower costs without impacting the business, such as cheaper utilities or broadband deals. However, if cash reserves are very low more drastic cost cutting measures may be needed.
Help to overcome cash flow problems
If your business is struggling with cash flow problems, there are a variety of financial products which can provide assistance. For example, if you have a number of invoices which are overdue, it may be possible to sell your invoices to a third party, which will ease your temporary difficulties by drawing cash against these unpaid invoices. Alternatively, there are a variety of borrowing options available such as overdrafts, loans and credit cards, which could provide the increase in cash you need to weather the storm.
Here at BusinessComparison, we specialise in helping businesses find the best deals for everything from loans and overdrafts to utilities and insurance. To find out more about how we can help cash flows, please contact our team today.