The cash flow within a business is the amount of money coming in and the amount of money going out each month. Obviously, in order to see success as an organization, you need more money coming in than going out. That is why as leaders of a business, it is imperative to understand the importance of cash flow management.
Cash inflow is defined as payments or other money that is paid to the company. This is usually comprised of customer payments, money from investors, or interest in investments.
This exact cash later becomes payment for things that make your business run: expenses like stock or raw materials, employees, rent and other operating expenses. Needless to say, the more cash inflow, the better!
What are the tiers of cash inflow? High positive cash flow means your business has enough money coming in each month to support further investments such as adding physical additions to your building space or personnel additions to support the business.
A negative cash flow, on the other hand, is the opposite of this. When your business has a negative cash flow, more money is leaving the business each month than is being retained or coming in as new revenue.
In between a negative and a high positive cash flow lies a positive cash flow. This is when your company has enough money coming in each month, but it could stand to improve its inflow and decrease the amount of money leaving the business.
How can your company maintain a positive or even high positive cash inflow? The first step is a thorough understanding of your business’ finances. When you understand the cost of each aspect of the business, you will be prepared to manage the cash flow of your company. If you become involved in the monthly reporting of finances, you will become educated on the business costs very quickly! Getting acquainted with your business’ monthly income reports is highly recommended, especially for new business owners or someone taking over a previously owned business.
The next step in managing the cash flow of your business comes via budgeting. Budgeting your business is a great way of taking control of your expenses and setting targets for your sales. Now that you have a complete understanding of the finances of your business, you will know in which areas to budget and how to do so.
Cash flow management is the lifeblood of any business. When you have an awareness of your company’s cash flow, you are more well-informed to make important decisions that affect the success of your company.