Importance Of Cash Flow For The Company’s Health
Understand how financial management may impact short and long term investments of your business.
Autonomous contractors or those who have their own companies can be great entrepreneurs in their business. In this context, to understand how the health of the company is, it’s ideal to implement a cash flow.
What is Cash Flow?
If you needed to buy new equipment for your business, or even hire a new employee, would you know whether your company has money available for this investment?
To help entrepreneurs answer these and other questions, there is the cash flow, an important management tool that can be simple to implement.
The cash flow assists in financial management, listing all the company’s cash inflows and financial outflows and even can project expenditures for future periods. In this way, the entrepreneur will be able to know the cash balance during the projected period.
Benefits of having a Cash Flow for your business
The main objective is to organize the company’s spending, giving security to make purchasing and investment decisions. Discover the benefits that the cash flow will bring to your business:
- It provides the business owner security and speed for decision making: With all the information on cash (inflows, outflows and financial forecasts), the business owner feels more secure to make purchasing and selling decisions. With a positive balance and good financial forecasts, this can be, for example, an interesting time to hire a new employee and expand service. While with negative balances and lower sales forecasts, the entrepreneur can opt to create strategic promotions.
- Prevents purchases and investments that impact negatively on the company’s health;
- Prevents purchases and investments that impact negatively on the company’s health: The cash flow allows us to know the financial health of the company, such as accounts receivable, accounts payable, available funds. This way, investments that will generate negative financial impacts can be avoided. Should investments be made in stock that might not move for months? If the balance is negative, this is certainly not a good decision. Better to invest in products that will have more turnover and will move the business;
- The cash flow increases the quality of the company’s financial management and reduces the withdrawal of Working Capital resources. Working capital are the resources (value in cash, inventory, receivables) that support the day to day operations and allow your business to maintain turnover;
- It assists strategic planning in several areas (financial, commercial, human resources);
- Allows the company to increase or decrease customer credit in a balanced manner: If the business, for example, has too much debt, this would not be a good time to sell products with long payment periods. Maybe it’s more interesting to give a discount, make cash sales and have money in cash to ensure paying down debts. If the company’s health is doing very well, this is an opportunity to increase customer credit. After all, during this time it’s more interesting to receive more in the long run than less in the short term.
How to implement the Cash Flow?
The entrepreneur can opt to create their own cash flow in an Excel spreadsheet for example, or choose a management system.
Creating your own cash flow will require more efforts. To be effective, it’s necessary to first conduct an inventory of all expenditures and revenues (current and future). Ideally, this cash flow should be projected forward for at least three months and updated periodically. But beware: in estimating expected revenue, be rational and avoid optimism. Always remember that some customers may delay payments or even cancel services. It’s important that your business is prepared for these possible unforeseen losses.
Financial management and Cash Flow systems on the other hand are less complex and facilitate everyday life. Online systems are less expensive and allow you to get access to your business data, wherever you are, through mobile and tablet apps. An example of an online Cash Flow system is the Blue Account Software (click here and learn about how online systems help in business management).
To apply it, regardless of the model chosen, it’s important that the entrepreneur has financial awareness and organization. A bill that needs to be paid but is not registered, or revenue incorrectly projected, may compromise the projected financial outlook into the future. This means that poor execution of cash entries may catch the entrepreneur financially unprepared.
Importance of cash flow reports
With the issuance of cash flow reports (which can be done daily, weekly and monthly) it’s possible to have an overview of how your business is doing. With greater confidence, investments to be made can be pointed out, such as hiring new staff or buying products for inventory, and when they can be made. Besides this, the priority level to increase profits becomes clearer, being able to carry out product promotions or discounts to leverage resources, for example.
Without this cash flow analysis, the entrepreneur may have the illusion that he’s making a lot of profit, when in fact he’s losing money or something is going very badly.
For these and other benefits the cash flow is a gauge of the financial health of companies. Without it, it’s virtually impossible to make informed decisions at the speed the market demands.