Tracking and understanding cash flow is vital for any business. Cash flow is one of the most critical components of success for a small or mid-sized business. Without cash, profits are meaningless. 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.
You need to know how the amount of money you bring into your business compares to the amount going out. If you’re spending more than you’re earning, you need to make changes to avoid going out of business. There’s an old adage about business that “cash is king” and, if that’s so, then cash flow is the blood that keeps the heart of the kingdom pumping. Put simply, cash flow is the money that will be coming in and going out.
To achieve a positive cash flow you have to work at it. Positive cash flow does not come by chance. You need to analyze and manage your cash flow to more effectively control the inflow and outflow of cash.
A positive cash flow is actually needed to generate profits. You need enough cash to pay your employees and suppliers so that you can make goods. It’s the sale of those goods that helps generate a profit. But if you don’t have the money to make the goods, you don’t end up with the profit. So you really need to structure your business to have a positive cash flow if you want your business to grow and increase profits.
And it’s important to regularly track the movement of funds in and out of your organization to identify where your business is from a financial standpoint and where it will be in several months.