Importance of Cash Flow in Business

Cash flow is an important point of concern for any business that wants to stay afloat or expand.

This post Importance of cash flow in Business is an in-depth study of the benefits of evaluating cash flow in businesses

What is Cash Flow?

The cash flow statement records the amounts of cash and cash equivalents entering and leaving the company. Cash flow statements can easily reveal a company’s financial health.

In order to understand cash flow for a particular business, there is a need to study financial statements of that business. This is because a financial statements is a detailed report of your cash flow.

In the course of going about your business, it is easy to miss out on some payments or receipts given or collected. You may not be able to fully recollect every one of the transactions made.

Cash flow statement is a detailed record of your financial statements usually provided by your bank. This record your finances and this document can help you easily understand your cash flow.

Related: Starting a business in Nigeria

Cash flow statements

A company can appear profitable “on paper” but not have enough actual cash to replenish its inventory or pay its immediate operating expenses such as lease and utilities.

Cash flow statements, provide a more straightforward report of the cash available.

Cash Flow Models

Every Business has its own pecliar Cash flow features. These features show the way the company recieves money determined by theor business model

Saas Business

Cash flow can help SaaS business understand the relationship between customer acquisition cost and lifetime value of the customer.

Uses of Cash Flow

Companies use them for budgeting because they predict future cash flow.

  1. Identify deficiencies in performance
    A comparison of the historical and projected cash flow statements can be made so as to find the variations and deficiencies or otherwise in the performance so as to enable the firm to take immediate and effective action.

Determining Cash flow

Cash flow is determined by looking at three components.

The core operation component reflects how much cash comes from a company’s products or services.

Changes in cash in accounts receivable, depreciation, inventory, and accounts payable are reflected in the cash from operations to calculate cash flow, adjust the net income by adding or subtracting differences in revenue expenses and credit transactions. Non-cash items calculate into the net income as well as assets and liabilities. Transactions not involving cash items often have to be re-evaluated when calculating cash flow from operations.

In the process of calculating impressive stored in your cash flow. The first thing to do is to separate expenses, revenue, and Depreciation.

After I’ve been done this, the next thing is to begin to analyze our revenues correlated to. Your expenses you need to determine your cost, profit ratio, and several other metrics that are related to.

For example,

Depreciation

Depreciation is not a cash expense, it’s an amount deducted from the total value of an asset like manufacturing equipment, it’s added back into net sales when calculating cash flow income from an asset is accounted for in cash flow calculations only when it’s sold. It’s considered cash in changes in equipment.

Assets or Investment

Assets or investments related to the investing component. Investing is considered as cash-out because cash is used to buy, for example, new equipment

Financing

Financing is cash in when capital is raised and cash out when dividends are paid. Changes in debt, loans or dividends account for the financing component

Importance of cash flow in Business

Identify revenue leaks

Cash flow analysis helps to identify points of drain in the flow of cash.

Improvement in business model

Cash flow analysis helps refine your business model for greater profitability

Raising Capital

Lenders often look at cash flow to determine if a business is able to afford the debt its looking to take on.

When a business is looking to expand it is important it is able to afford the growth and sustain operations. Cash outlay will considerably exceed cash inflow during an expansion or marketing campaign. This increased cash outlay will most often take the form of increased personnel cost, equipment, new office locations etc. The company must be able to remain in business after the growth campaign has been successfully or otherwise executed.

Seeking extra debt is not usually an express way out of existing debt as lenders expect that debts be serviced- in form of cash payments- from time to time throuhout te lifetime of the debt. This servicing will require sustainable cash inflow to meet u

Conclusion

Overall, Understanding a company’s cash situation
is crucial to making sound business decisions. Owners
must strive to understand and always be in touch with
the cash aspect of their enterprise, regardless of the
profits reported.

John Omokayode

Mechanical Engineering | Business Developer - I have a particular liking for the business side of everything. African businesses are capable of shaping the world economy!

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