Several studies have revealed that poor business management is one of the leading causes of business bankruptcy and failure. Specifically, account/cash mismanagement is the reason why many businesses foiled up. To build a sustainable long lasting business, an in-depth understanding of the concept of cash and cash flow is important. It is only when there is a proper understanding of these terms and concept that any individual or business can stay on top of its finance or cash flow.
Cash refers to the ready money in hand or in the bank which can be used for the running of a business. Cash is said to be the lifeblood of any business. It is what is used for paying for salaries, purchasing of goods, paying bills and rent, etc. Cash is different from profit. Profit is a certain sum which is expected over a period of time. A growing profit does not necessarily translate to a healthy state of a business. A business may be making huge profits but if there is no cash at hand it still stands the chance of being in serious trouble.
Cash flows describe how money comes into and goes out of a business. It is the traffic of cash into and out of a business. It is subdivided into cash inflows and cash outflows. Cash inflows refer to money that comes into a business, this could be from sales of goods, the offering of services, investment from outside sources etc. Cash outflow refers to the money that goes out of a business, this could be in the form salaries, paying rent and bills, paying creditors etc.
In order to be on top of finance, any business owner must find every way possible to maintain a positive cash flow; the amount of cash coming into the business must be greater than that going out of it. There is a regular need for self-assessment. In a case where there is negative cash flow, the entrepreneur must cut down on expenses and seek out ways to improve cash inflow.
A business that is on top of its cash flow and finance will be able to pay its bills and pay them in a timely fashion. Paying bills in a timely fashion helps build trust with creditors, thereby putting the business in a better position for future credits.
A business that can maintain a positive cash flow is in a better position for expansion and growth. With greater cash availability, purchase of more asset and infrastructure needed for greater production is possible.
No business owner hopes for it, but there would certainly be times when sales may drop or the period between sales and receipt of payment may lengthen. In cases such as this, a business that is on top of its finances and possesses a positive cash flow will have cash reserves that would help it survive through the tough periods. Because, regardless of the toughness of that period, bills and salaries must be paid.