Understanding Your Cash Flow
Managing cash flow properly is important to the success or your organization. Cash flow is one of the things that you constantly need to monitor or you could end up with a very serious situation. Cash flow that gets in the red is a sign that your company is hurting. If you do not have enough cash flow, you do not have money to pay for your companies needs. You must have a backup system in place that helps you with cash flow in the event that you do have customers that stop paying their bills and you have a large accounts receivables to deal with.
What is cash flow?
Simply put, cash flow is a financial measurement of your companies money that is spent and generated during any given time period. Having an accurate prediction and understanding of your company's cash flow can help you to know if your organization is in good financial health or if you need to start working on collecting the funds that are owed to you and dropping your expenses significantly. Any time a company starts dealing with cash flow woes, it indicates a serious problem.
The need for strong cash flow
When you are able to accurately predict your cash flow needs, you will be able to have better control over your company's financial health. You will know how much you can afford to spend on certain things and you also can determine if you need to step up your collection efforts. What a lot of companies will see with cash flow is that you have a clear picture for the marketing team to know how many sales they need to generate in order to have plenty of money to keep the company open. Then they will know how many sales they need to make to go above this marker in order to continue generating profits for the company. There are some other things that are based on the cash flow as well including the following:
- How much money you are able to borrow
- If you can afford to purchase new equipment or to hire new employees
- How quickly you can pay your vendors
- If you need to change your pricing structure
- If you should continue granting credit to customers
- If you need to work on reducing your expenses
Analyze your cash flow
In order to get started on your cash flow needs we can begin with doing an analysis of the cash flow. Break it down into various sections so you can see what all goes into your cash flow. For you to have a strong cash flow, you really need to consider the accounting method that you are using. Always make sure that accuracy is the number one thing, which is why you out to consider something like QuickBooks or another program to help you out. There are also cash flow forecasting spreadsheets and templates that you can use that will really help you to understand your cash flow needs and will also make it easier on you to manage your cash flow effectively.
You may have heard about this before but when you are working on your cash flow, one of the things that you really do need to work on is creating a what-if analysis of your cash flow. It helps to come up with several different projections for your company. These projections will show information on how the situation can help your company or it will show information on the worst case scenario for your company. The more you understand, the easier it will be for you to have proper management of your cash flow.