There is a popular saying that many business owners have heard: “Cash is King”. Although this is a common phrase, what is the actual meaning and is it accurate?
Cash flow is the incoming and outgoing of cash in a business. As income from sales is received, money is usually paid out as expenses incurred by running the company. However, unless the cash flow is tightly controlled, problems will soon occur if anything in the process does not run according to plan.
What are the principles of cash flow?
Ideally, a firm will have more money coming into the business than being paid out. If expenditure exceeds income, the company will experience difficulties, possibly resulting in liquidation. You also have to balance the timing of incoming revenue and expenses, so that you always have sufficient funds to pay your outstanding invoices. If incoming payments are late, this will impact on your outgoing expenditure. Having a healthy cash flow will usually give a company greater leverage when it comes to negotiating contracts with suppliers, saving money in the long term. Rather than monitoring cash flow and hoping for the best, it is necessary to be proactive and anticipate any problems with potential shortfalls or lack of funds. This is often a role carried out by a financial outsourcing service, which will save both time and money.
Cash flow analysis
One of the most important statements for a company is the cash flow statement. Checking the statement involves studying the deposits and withdrawals from your company’s finances. A cash flow statement will normally cover a specific period and will include all deposits and withdrawals during that time. Using this information, it is possible to produce a cash flow budget, so that you have an idea of what to expect during the next few weeks or months. An important factor of cash flow analysis is the timing of payments. If a company has late payers, it will experience difficulty with its own expenditure and payments.
Calculating working capital
Working capital is a crucial factor of cash flow analysis and is the money available to pay the company’s bills. Calculating the amount of working capital will enable the company manager to decide whether there are sufficient funds in the business or whether steps should be taken to improve the health of the company’s cash flow.
Cash flow is the lifeblood of any company. If you would like to discuss any aspect, please call to arrange a meeting.