Simply put, cash flow can be defined as the phase when you get paid by the customers and when you should pay the bills. The cash flow statements highlight the net change in an organization’s cash position, especially from one phase to the next. So, if your company takes in increased cash than the cash you send out, then there is a positive cash flow. On the other hand, your company has a negative cash flow when you are paying increased interest, payroll, and bills than the amount you are receiving. Your company’s cash flow is an indication of financial health Brian C Jensen.
Brian C Jensen shares the relevance of cash flow
Every business should pay attention to its cash flow. The following pointers can explain why it is essential to do so.
- Profitable companies can get bankrupt
It is necessary to understand the concept of cash flow and profit. Simply because the consumers have placed several orders for your product doesn’t indicate you can pay the bills. For instance, you can sell $100,000 worth of your products on credit, providing the consumers a 60-day term. And you might have placed an order for $70,000 worth of the supplies for the products for the concerned order, and you need to pay the suppliers within a span of 30 days. So, if there is an expense of $50,000 due that you need to pay in less than 60 days, there won’t be cash to pay your bills.
Even though you might be able to pay the bills by seeking more time from the creditor, there will be poor cash flow. And it will make you lose out on your lenders, suppliers, and vendors that will hamper your business. Hence, it is necessary to have a positive cash flow.
- To keep up with the debt
As you borrow cash for buying equipment, inventory, and buildings, you are using future cash flow for the purchases. Positive cash flow is essential to pay all debt. The organizations typically have short-term credit accounts with the vendors and long-term loans. Every loan needs a monthly payment. So, when you get obligated to make ongoing payments, it limits the free cash flow. It could be the cash available for investing in business expansion.
- Good cash flow can maximize opportunity
In addition to debt management, a good cash flow offers you scopes in business growth and expansion. When you have a strong and positive cash flow, you can:
- Develop new locations
- Renovate the infrastructure
- Invest in research and development
- Purchase more inventory and assets
- Improve technology
- Provide more training to staffs
When you have excess cash flow, it enables your organization to function proactively and strategically.
Depending on what a cash flow statement shows, you might have to maximize the incoming cash or cut expenses. Enhancing receivables collections by letting go of customers who pay late and discounts can help you keep a positive cash flow. According to Brian C Jensen, it is essential to review the cash flow statements in advance to detect if there is an area of concern. It will ensure that you have ample cash on hand to carry on operations.