Cash flow is essential to any business, especially if you are a small startup or a family-owned company. Having cash available is essential to any sort of expansion or growth, it is key for any business to thrive. First understanding cash flow is absolutely necessary to learn how to avoid problems as well as how to solve them. While there are many causes of these issues, you can avoid cash flow problems and deal with them when they do pop up. The first step is getting familiar with what we’re talking about here. Read on to see what you can do to prevent cash flow negativity and bring it back when it goes under.
But What is Cash Flow?
While the concept of cash flow is fairly simple, it can elude people. It can obfuscate them. Entrepreneurs inevitably manage cash flow. It’s important to understand that cash flow is simply the movement in and out of your business, but you should understand how this works. First, the flow of cash is the transactions in your business bank account. When you have enough money in your account to cover bills, you have positive cash flow. When there is more money leaving your company than coming in, you have a cash flow issue. How do you figure this out? You subtract accounts receivable from accounts payable.
Accounts Payable vs. Receivable
A liability account that tracks the money leaving your business, this includes payroll, bank loans, or other business expenses, accounts payable tracks the money that leaves your business, or the money that you owe. This can include a lot of things, but specifically payroll, business expenses, and bank loans. Accounts receivable are assets that keep track of money coming into your business, which is money received from customers for the goods and services you provide. This is an important part of calculating the profitability of your company.
You determine your company’s profitability by adding up all your assets, including accounts receivable and subtract your total accounts payable. When the result is positive, your business is profitable. If it’s negative, then you will need to look into ways to change this. Furthermore, you should understand that cash flow and profit are different things. You can have a profit while having a problem with cash flow. This stems from issues regarding inventory, payroll, and more. Once you understand this, you can gain cash flow without worrying too much about it.
There are many reasons you can have problems with cash flow. Development of real estate, for example, has always been a highly cyclical industry. Developers are prone to cash flow problems because property development requires significant initial capital investment as well as ongoing cash outflows for operations and other things.
Some of the development can be sold before construction, but developers often run into cash flow problems before the development begins to sell off, particularly if the market happens to lack. Another example is a business going through rapid expansion, which usually involves higher labor costs new employees are hired. Higher rent for additional space, higher advertising costs, and more capital investment for new facilities and equipment. Maintaining increased levels of inventory can also dive into excess cash.
Finally extending credit to other businesses is another common way for companies to fun into problems with cash flow. Invoices are normally done between a month and two months. It isn’t unusual for customers to delay payment, which can leave a business in a crunch.
Solving Cash Flow Issues
Besides preventing cash flow problems, solving them can be a little difficult. However, there are a few ways you can do this. Decreasing inventory is one way to do this. Cutting down on payroll is another. Finally, you can get a loan. While they aren’t recommended for every situation, short-term finance options can help businesses overcome cash flow problems, according to MoneyPug, a site commonly used to find payday loans. Payday loans aren’t known for their positive position in the market for finance, but they can help when you’re in a jam. But that’s all they should be used for. Short-term loans are designed for quick fixes, but this also means that you should use them for specifics things and pay the money back immediately.
Whatever size business you are, positive cash flow is instrumental. Keeping your cash flow healthy is very important. Do so by paying attention and working to prevent these issues. Getting out of them is tough, but it is not impossible.