Cash flow is one of the most critical components of success for a small or mid-sized business. Without cash, profits are meaningless. It is basically the movement of funds in and out of your business. You should be tracking this either weekly, monthly or quarterly. There are essentially two kinds of cash flows:
Positive cash flow
Negative cash flow
Many a profitable business on paper has ended up in bankruptcy because the amount of cash coming in doesn't compare with the amount of cash going out.
Achieving a positive cash flow does not come by chance. You have to work at it. You need to analyze and manage your cash flow to more effectively control the inflow and outflow of cash. There are a number of free cash flow worksheet online which you can use. They come in simple editable Excel spreadsheets which most business owners are familiar with.
The three key elements of your cash flow analysis include:
- Accounts receivable: What customers and clients owe you.
- Accounts payable: What you owe your suppliers.
- Shortfalls: You hope not to have these, but they do happen.
Most business owners see growth as the solution to a cash-flow problem. This is why they often achieve their goal of growing the business only to find they have increased their cash-flow problems in the process.
Plan for growth and the related cash outlays in advance, so they do not come as a surprise.