Cash Flow in any business basically means the cash inflow from the revenue minus cash outflow from the expenses. Positive cash flow occurs when the cash receipts in the business from sales, accounts receivable, etc. are more than the amount of the cash leaving your businesses through accounts payable, monthly expenses, salaries, etc. Negative cash flow occurs when the outflow of cash is greater than your incoming cash.
“Cash flow” and “Profit” are entirely different concepts. Positive cash flow does not mean the business is in profits it has so many different layers to it. A business can have sound cash flow but cannot make profits. Profit is revenue less expenses also called as ‘Net Income’. Whereas cash flow is the inflow and outflow of cash. Revenue does not always mean an increase in cash similarly expenses always does not mean a decrease in cash.
Cash flow management is extremely important for businesses now more than ever since the whole world is facing an economic crisis. Even a profitable business can fail if cash flow is not managed properly. If a company does not have enough money available to pay the creditors or suppliers, it might result in a cut-down or no supplies at all, from the suppliers.
There are many areas in a business that can have an impact on the cash flow. It is important to understand how customer payment terms, supplier payment terms, loan payments, future spending decisions and other items can affect your cash flow. It is also vital to avoid extended cash shortages, as no business can survive with an extended delay of payments and bills. Cash budgets help the business to allocate budgets to various activities for various purposes. Cash budgets also help in anticipating the needs of the company in the long run for the general outcome of cash collection and generation. Focusing on collecting receivables on time, tightening credit requirements, increasing sales, pricing discounts, securing loans, cash reserves, reducing overheads, etc. can improve cash inflow. Working capital is also incredibly helpful in case of a cash flow crisis. Having positive working capital indicates that a company can fund its current operations and invest in future activities and growth, whereas negative working capital means an excess of liabilities over assets. It is advised to always keep buffer money enough to fund your business at times of crisis.
Cash flow management for business can be summarized as the process of monitoring, analyzing, and optimizing the net amount of cash revenues minus cash expenses. Net cash flow is an important measure of financial health for any business. Cash management is an important issue for any business to increase its overall stability and survival.