Understanding About The Cash Flow

Understanding About The Cash Flow

The money that is coming into the business from the revenue and the money that is going out to make payment for various expenses are known as cash flow. A good management of cash flow ensures that you will always have money available at your disposal for making all the expenses which are due.  Any profitable business can end up as a failure if the cash flow is not properly managed.  If the business does not have enough cash available to pay the suppliers or lenders, then the banks would foreclose and all the suppliers would cut all the supplies.

There are various areas in the business which impact the cash flow. Hence it is very much important that you should understand the customer payment terms, loan payments, supplier payment terms, decisions on future spending and all other items that will affect the cash flow.

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Monitor and plan the cash flow

Monitoring and planning the cash flow should be one of the critical things you need to do when you run a business. It should include how to address the cash shortfalls or the surpluses as and when it occurs. The cash flow statement would assist you in forecasting the cash going out and coming. It’s usually done on an annual basis and is broken down into each month.

In order to forecast the cash flow annually, you should estimate and also record the below-mentioned amounts for every month:

The total monthly outflow of cash- It includes items like loan payments, supplies, purchases, electricity, telephone, wages, and all other bills

The total monthly inflow of cash- It includes sales of assets, the sale of products or services, interest revenue, capital injections from owner’s funds or borrowings and any other sources

Opening balance- You need to make an entry of the cash that is available at beginning of the month

Net cash flow- Net cash flow is calculated by deducting the total cash outflows from total inflow to check whether more money is going in or out

Closing balance- You could calculate the closing balance by adding opening balance and net cash flow.  This amount would become the next month’s opening balance.

You need to arrange for funds immediately if it shows a negative balance and invests the surplus amount wisely.