Whatever size business you are involved in, cash flow is key. Especially if you are a startup, cash is pivotal to expand and grow. To thrive, you need to have cash on hand. If you know and understand cash flow, you can prevent problems with it and learn how to get out when it does occur. While you can use outside financing options, but you want to be careful to not get stuck in the grip of short-term loans. Cash flow is critical. Here are some tips on how to avoid issues with cash and get out of problems that come with a lack of cash flow.
What is Cash Flow?
Cash flow is a fairly simple concept, but it is something that obstructs the growth of a business. To expand and thrive as a company, you need to have money around, not only for investments but for daily functioning. The flow of cash represents the movement of money in and out of your business and it impacts everything. Think of cash flow as transactions in your bank account. When there is money in your account to cover bills, you have positive cash flow. If you don’t and the expenses exceed the cash coming into your business, you have negative cash flow and therefore a problem.
Understanding Cash Flow
It is very important to differentiate between accounts payable and accounts receivable. The latter represents your assets like a positive bank balance or cash on hand and the former are your liabilities, the bills, and debts that owe. Mixing the two is dangerous and can cause you many problems.
Accounts payable are liability accounts that track the money leaving the business. This may include employee payroll, bank loans, or other business expenses. On the other hand, accounts receivable are assets that keep track of money coming in. This is the cash you receive as payment from clients, customers, and others for goods, services, and other debts that you are owed. You can use the difference between the accounts payable and the accounts receivable to determine the profitability of your business.
Determining profitability can help you figure out if you will have cash flow problems. You can figure this out by adding up all of your assets, including accounts receivable and subtract the total accounts payable. If the result is positive, your business will be profitable. The difference between profit and cash flow must also be mentioned. Cash flow represents the balance but it’s possible to turn a profit and have zero cash. You may earn a certain amount from items, products, or services you sell, but if you have more expenses than the income you still have negative cash flow.
Cash Flow Problems
Issues with the flow of cash can be the result of many different things. When a business undergoes rapid expansion, cash flow problems are common. Expansion usually involves higher labor costs as new employees are hired, higher rent for additional space, higher advertising costs, and more capital investment for new facilities and equipment. Inventory levels can cause cash flow problems. Extending credit to other businesses is another common way for businesses to run into cash flow problems. Invoices are typically fulfilled on 30 or 60-day terms and it isn’t unusual for customers to delay payment, which often leaves businesses in a cash flow crunch. To avoid this situation you should definitely automate your AP process, as it will speed up the payments as much as possible.
Solving the Problem
According to the experts at MoneyPug, a platform people use to find same day loans, the best way to solve a cash flow problem is to prevent it but there are some things you can do. You can cut down on inventory costs. You can minimize your staff. Leadership can take a pay cut. Finally, you can take out a loan.
Business finance can be a good way to increase cash flow, but you want to be careful not to get stuck in the cycle of loans and debt. Short-term loans are best for solving a particular problem, not just increasing cash flow in general. If you need to pay for a particular thing, taking out a loan can be a good way to keep cash flow and get what you need done. Still, by far the best way to avoid these problems is by understanding how it works and what you can do to stay ahead of negative cash flow.