As a small business owner, you know that cash flow is the key to success. But what is it, exactly? In simpler words, your business is alive and thriving, and it’s essential to keep track of your cash flow statement to make sound financial decisions.
Three main factors affect your cash flow: income, expenses, and debt.
- Income is the amount of money your business brings in each month.
- Expenses are the costs of your business operations, such as rent, inventory, marketing, and employee salaries.
- Finally, debt is the money you owe to banks, suppliers, and other businesses.
Your cash flow statement tells you how much funds your business owns to pay its bills each month. It’s essential to ensure your income is more significant than your expenses and not carry too much debt. If your cash flow is negative, you’re losing money each month, and you need to take action to FIX IT. It is suggested you seek help from experts at Denver accounting companies.
A Brief Explanation of Cash Flow
Cash flow is not to be confused with financial statements such as Profit and Loss (P&L), Balance Sheet, or Cash Flow Statement. Instead, it is an organizational management system that focuses primarily on the timing of cash receipts and disbursements rather than the kinds of assets and liabilities listed in a company’s books.
A business can have a positive or negative net income and still have a positive or negative cash flow. The cash flow statement looks at the actual movement of money flowing in and out of the accounting companies. In contrast, the other financial statements look at the company’s financial position (assets, liabilities, and equity) at a specific time.
Types of Cash Flow:
There are three types of cash flow: operating, investing, and financing.
- Operating cash flow
This is the cash flow from a company’s regular business operations, such as sales of products and services, collection of accounts receivable, and payments for goods and services. - Investing cash flow
The purchase or sale of capital assets, such as land, buildings, equipment, or securities. - Financing cash flow
This is the cash received from issuing debt and equity sources of financing. For example, a company with excess cash can distribute it to its shareholders through dividends paid out or use the cash to retire some of its outstanding debt.
Importance of Cash Flow in Business
Cash flow is one of the most important aspects of any business, large or small. A company with a healthy cash flow can meet its liabilities as they come due and finance its operations without relying on outside sources. Conversely, a company with a negative cash flow is at risk of not meeting its obligations and may even have to go out of business.
The ability to generate positive cash flow is essential for any company looking to grow and expand. It allows a company to finance new product lines, marketing campaigns, and other investments that can help it expand its business. Conversely, a company with a negative cash flow is more likely to face financial difficulties and may even have to downsize or close its doors.
Cash Flow is the X-factor of Modern Business
A business cannot survive without cash flow. Therefore, cash flow is often cited as the most critical factor in a company’s success or failure; Mainly because a business needs cash to pay for its expenses, such as employees, inventory, and rent.
Cash flow is essential for small businesses, which may not have the resources to cover their expenses for an extended period. A business can improve its cash flow by increasing its sales, reducing expenses, or both.
It is also essential to keep track of your company’s cash flow as this will help you identify potential problems and take strong measures before they become too costly.
Cash Flow is Especially Important in a Business’s Infancy
A new business will likely have little revenue and a lot of expenses in the early stages of its operations. There is often a drastic difference between expenses and revenues during the first few years. A new business that does not control these cash outflows may quickly go bankrupt. Therefore, a new business needs to practice cash flow analysis from its inception.
There are a few ways to improve a business’s cash flow –
- Increase sales
This is the most obvious way to improve cash flow. A business can increase sales by increasing its marketing efforts, offering discounts, or expanding its product or service line. - Reduce expenses
A business can reduce expenses by negotiating better prices with suppliers, outsourcing work to cheaper vendors, and reducing its workforce. - Practice cash flow analysis
Regularly keeping track of your company’s cash flow will help you identify potential problems and take strong action before they become too costly.
In short, cash flow is the lifeblood of any business. Therefore, it is essential to keep track of it regularly and take steps to improve it if necessary. By doing so, Denver accountants at GCK Accounting can ensure the long-term success of your business.
Cash Flow is also Essential for a Business in Expansion Mode.
A business in expansion mode will likely have higher-than-normal expenses as it ramps up its operations to meet increased demand. This can put a lot of strain on the company’s cash flow. Therefore, it is essential for a business in expansion mode to have a cash flow management plan that reduces expenses and increases revenue.
Embrace the Challenge of Managing Cash Flow
Small businesses may find it challenging to manage their cash flow, as they often do not have the same resources as larger businesses. In addition, a business may experience cash flow problems if it is expanding rapidly or if its primary customer base is composed of slow payers.
Cash Flow Challenges Can be Overcome
Many small business accountants in Denver overcome their cash flow challenges with the help of the following steps:
– Increasing sales
– Reducing expenses
– Securing financing
– Developing a cash flow management plan
Although managing cash flow can be challenging, it is crucial for any business firm. By understanding the basics of cash flow and implementing a sound cash flow management plan, you can help your business thrive in good times and bad.
Takeaway
Cash flow can be a big problem for small businesses that don’t have the resources to cover their expenses. However, there are several ways to combat the same, including increasing sales and reducing expenses. Cash flow management is an essential task for all businesses, whether they are experiencing cash shortages.
Why contact GCK Accounting?
GCK Accounting is one of the best-known professional Denver accounting firms that can help your business improve its cash flow. We have over 25+ years of experience assisting businesses to succeed, and we know how to get your company’s finances back on track. If you are looking for business accounting Denver-based services, then we are here for you!
To learn more about how GCK Accounting can help you improve your company’s cash flow, visit our website today!