Cash flow refers to the amount of money going into and coming out of your business. It helps you evaluate the amount of cash that is available at any given time and provides projections of potential changes in cash flow.
Keeping up-to-date with changes in cash flow is critical to the success of small to midsize businesses and can help you take control of your company’s financial standing.
Always know which way your cash is flowing:
It is important to remember that cash flow is NOT the same as profit.
Profit balances your income, expenses, and tax calculations. Cash flow focuses on the daily movement of cash flowing in and out of the business and provides insight into the trends of money movement.
When you manage your cash flow, you’ll be able to answer questions like:
Having accurate cash flow figures will help your business when requesting loans, credit approval, and help your business avoid having a cash-related crisis in the future.
To increase cash flow, take a look at the following areas of your business:
Managing your cash flow helps you see and plan for peaks and valleys in your business. There are a lot of reasons businesses ebb and flow, from weather to the change in seasons to the health of the economy. Properly managing your cash flow will help reduce the impact of a valley where you have limited cash availability.
Different Gaps in the Annual Cash Flow
Intentional Gaps are purposefully reduced cash flow that results from large purchases like inventory, equipment, hiring, or expansion of the business (funds for construction/renovation, taxes, permits, etc.)
Unavoidable Gaps refer to seasonal trends in businesses like construction, tourist attractions, hotels, etc. An unavoidable gap may also refer to logistical availability and many other factors contribute to an unavoidable flow. Proper cash flow management can help your business “float” through the valley to the next peak.
Unforeseen Gaps are unplanned, sometimes unavoidable events like natural disasters, poor supply from wholesalers, and bad cash management that lead to an unplanned decrease in cash flow.
At C.E. Thorn, CPA, PLLC, our small business accounting team can help create a budget for your business and manage your cash flow by developing a cash flow strategy and reviewing and revising it as needed.