Maintaining a good cash flow is essential to every business – by not having cash on hand will make it hard to buy materials, settle bills and pay salaries. This article will give you an overview of cash flow, how to maintain a good cash position and where to invest surplus cash.
Cash flow is the money that comes in and goes out of a business.
Cash inflows and outflows are classified in three sections:
Positive cash flow is when a business is generating more cash inflows than outflows. Negative cash flow is when cash outflows outweigh cash inflows.
A good cash position is driven by organisation and planning. There are a number of actions a business can take in order to work towards maintaining a good cash position.
Cash is vital to any business to ensure that necessary business expenses can be paid. A business may expect a high volume of sales and large profits in the future, but if there is not enough cash coming in now to cover the business expenses then that profit may never happen.
Good cash flow is important as it means a business is able to meet its financial obligations when they become due - suppliers can be paid, loan repayments can be made, etc. Cash inflows eventually become cash outflows, so ensuring that cash receipts outweigh payments is key to a successful business.
Forecast: Look at your monthly income and expenses and plan for these going forward.Find out more
Receipt of Cash: If you offer credit to your customers then anything that can speed up the receipt of that cash will help your cash flow.Find out more
Payment of Expenses : If you have a company credit card then you may wish to consider using this for purchases depending on the amount of time the credit card provider gives for statements to be paid.Find out more
Manage Inventory: Review the amount of stock you are holding on average and reduce this if possible.Find out more
Cash flow is crucial to all businesses - particularly small businesses and startups. In simple steps this short video will teach you the value of proper cash flow forecasting, describing some key accounting concepts such as net movement. It will lead you though through the process of creating a cash flow forecast and explains why such a forecast would be used in a business context.
Click on the download button below to access and use this cash flow statement.
This document can help you:
Cash flow statement.xlsx48.32 KB
Cash refers to the amount of money a business has and is able to draw on immediately.
The cash balance is the net result of all cash inflows (money in) and outflows (money out).
Profit is the financial gain that is generated from a business’ operations, calculated by deducting costs from revenue (the amount of money a company receives). Profit does not take into account whether the revenue generated from sales has been paid in cash or is on credit and will be due at a later date, and similarly whether expenses have been paid in cash or will be due to be paid to the supplier in the future.
Upfront payments can also impact cash and profit differently. For example, if a business took the decision to buy a large value of materials in cash then the whole cost of this purchase would be reflected within the cash balance. However, if only half of the materials had been used by the end of the period then only half of the cost would be reflected within the profit number, with the remainder held as stock. For example if you had spent £600 on stock, but had only sold half of it during the accounting period, then your cash balance will have reduced by £600, but profit will only be reduced by £300 (the portion of the stock cost sold).
Simply, profit is recorded when a sale is made regardless of the transfer of funds, whereas cash flow is recorded when money is actually received or paid.
If you are looking to invest your surplus cash here are some things to consider:
Surplus cash can be invested in a number of ways depending on the amount, the level of risk and how long you wish to tie your money up for. Scroll through the carousel below to find out about some of the options available.
This page gives you some practical advice to help you forecast cash flows and options for improving your cash position.Read more
For many a small business owner every penny needs to be accounted for. Creating a budget will give you a clear idea of your expected income and expenses. This article will help you understand how to build budgets and where to get the information to prepare the budgets from.Read more
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