In the world of commerce, it is cash that keeps a business reigning. As a business owner overlooking your own kingdom, you will want to have as much cash flowing into the company as possible. This cash flow is an essential part of running a business.
But, why is cash flow important to a company and what can it tell small business owners?
The Importance of Cash Flow
Money coming in is the most important part of running a business. After all, the inflow of money is what pays the expenses and operating costs of the company. And cash inflow is generated through sales and payments from customers, investors, and interest on investments and savings.
Companies should aim for a positive cash flow that can cover their expenses with enough leftover to be reinvested back into the business or held in reserve for an emergency.
Without the steady inflow of money, companies can flounder and fail, as they do not have the cash to pay for their operation costs. That’s why the cash impact on businesses is immense and should, therefore, be monitored and analyzed to ensure a company is using their cash optimally.
What Cash Flow Tells You
The state of a business’s cash flow can tell investors a lot about the company. To depict the financial incomings and outgoings, companies will use a statement of cash flow. The cash flow statement illustrates the business’s operating, investing, and financing activities to portray a positive cash flow (high inflow) or a negative cash flow (low inflow).
A cash flow statement is an essential document for small businesses as it clearly states where the money is flowing in and out from, and their total cash balance. Using this document to track business cash flow can help owners determine how to best manage their money to successfully operate from day to day and month to month.
Potential investors can also look at this document and conclude how well managed and profitable a business is and whether they would want to invest in it.
Cash Flow vs. Profit
Profit, also known as net income, refers to the money left over in a business once all expenses have been deducted from revenue. It is the profit of a company in which taxes are calculated. Operating profit, gross profit, and net profit are the types of earnings a business will generate.
These earnings bring money into the business, but they might not increase cash flow right away. If a customer pays on credit, a business has made revenue, but they do not actually have the cash at that point in time. The cash impact of a sale may not hit the business account until much later, causing issues in cash flow management and the company’s overall financial position.
To get a handle on your business’s cash flow and profits, owners can use a cash flow projection to determine their future inflows and outflows of money.
Cash Flow Projection
A cash flow projection or cash flow forecast analyzes and reports on the current cash flow state to estimate the future state of cash flow. Projections can help owners prepare their business for the future, allowing them to anticipate their finances and plan accordingly.
If you can determine the future state of your business’s finances, then you can take the precautionary steps to safeguard against negative cash flow or plan the best use of money for the company when there is a positive cash flow. The cash flow analysis of these projections is a must if you want your business to succeed.
Read this cash flow projection e-book online to learn more.
Cash Flow and Accounting
The cash flow and accounting system of your small business are intricately linked. The method of accounting a company uses will directly impact their cash flow. Companies can choose between cash or accrual accounting methods to determine how they recognize revenue and record their finances.
Cash Accounting vs Accrual Accounting
The accrual accounting method dictates that a business must record a transaction when the original transaction takes place. A sale is recorded when an invoice is sent to the customer, even if the customer does not pay the invoice at that time. In contrast, the cash method of accounting would record that same transaction in their books on the day the cash is received. As the name suggests, cash accounting records the sale when the cash switches parties.
A business that uses the cash accounting method will have an easier time tracking cash flow. The financial statements record all transactions at the time of payment, making it straightforward to track the movement of money in and out of the business. On the other hand, the accrual accounting method does not follow cash flow, which can cause a company to look more profitable than it is.
Tracking Cash Flow with QuickBooks
Overall, the importance of cash flow in the operations and overall success of a business is immeasurable. But accounting software can help companies measure their monetary inflows and outflows to help manage financial transactions and record-keeping.
Cash flow plays a vital role in the life of your business. Low cash flow means you could have trouble paying bills, buying inventory, and settling accounts. But you can improve your cash flow with the right tools- like QuickBooks Online. Track and project cash flow and accounting statements to keep a reign on your business’s finances.
With cash flow projections and planners, financial reporting, and expense tracking, your business can take advantage of this accounting software today. Why not join the millions of other companies that have taken control of their finances with this quality software. Try it free today!