Understanding cash flow and how to manage it - part one

Cash flow is vital to the success of any business and is especially important to SMEs looking to grow and develop. The mismanagement of cash flow will more often than not leave your business vulnerable and could potentially lead to failure.

However, the benefits of positive cash flow stretch beyond simply keeping your business afloat. By managing your cash flow effectively you're able to better maintain your finances and can properly invest your money in gaining a competitive edge in your market.

The following is information and tips to help you better understand how to effectively manage your cash flow.

What is cash flow and why is it so important?

Cash is the cog that keeps your business operating and by tracking the movements of cash within your business you can effectively determine the current position you stand in.

It's essential that you maintain current records of cash that flows in and out of your business. Finding customers interested in your product is one aspect of keeping your business alive but unpaid invoices won't supply you with cash necessary to pay your suppliers, employees and financers.

Where does your cash comes from and where does it go?

For most SMEs the primary source of cash coming into the business will come from sales. However, some sales have the potential to linger around as account receivables in the instance of businesses that trade credit. So long as that account remains outstanding it cannot be classified as cash and can impact the cash flow of your business.

Whether you already run a business of your own or are just starting out, the cash that flows out of your business will go to the usual suspects; suppliers, employees, and money toward repaying debt or furthering investing in your business.

It's also important to note that your bank account isn't always a true reflection of your cash status. If you've paid a creditor with a cheque that hasn't yet been cashed you need to make sure that your account has the necessary funds to honour the original payment. Alternatively, it's equally important to deposit any cheques as quickly as possible so you can invest that money accordingly.

Keeping track of the cash that flows in and out of your business can be challenging, but your business has a greater chance of success if you have an understanding of your current cash status.


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