When it comes to keeping afloat and sustain a small company or a small business, nothing is ever quite as powerful as cash flow.
In order to give a proper and economically correct definition of cash flow, we can say that:
cash flow is the one element that represents the inflow and outflow of cash resulting from your ordinary business activities and exchanges with the market during a defined time span.
In more practical terms, cash flow is what determines if your business is:
Now, if you wanted to conquer the proper documental way of approaching cash flow, you would need to spend quite a while in close contact with your balance sheet and slowly build your way up to the Cash Flow Statement.
The Cash Flow Statement has a rather severe structure, which is based on:
And as you can tell, defining all of that would be rather time consuming and slightly inappropriate for an entrepreneur leading a small company that needs to bring results - and not papers - to the table.
In fact, there is a faster and more pratical approach that you can use to get a close up view of your relevant cash flow status without dipping your feet in bureaucratic waters.
This approach consists of four sequential steps that should take you no more than a few minutes each, allowing for a rather quick response time.
As we stated in its definition, cash flow shall refer to a defined period of time in order to be at its most effective.
In fact, if it wasn't like so, there wouldn't be much room for some relavant analyses such as the extremely useful patterns tracking.
Usually, there are two very common and widely used time frames, which are:
Both of those time frames make it quite easy to retrieve of all the information needed and they are extenstive enough to be representative, which leads to a result that's going to be very meaningful.
Note that you need to count only the effective transactions that took place inside your time span, because only the actual cash that has flown in is eligible to be considered.
Credits that were supposed to be collected but somehow didn't get collected over that period shall not be included, and the same goes for accounts receivables that have not yet expired.
Same as in step 2, only real cash is supposed to be considered. Accounts payable and other expenses that were generated but didn't manifest an actual cash outflow should be left out.
Bank accounts reconciliations or the company ERP system usually do come in handy when performing these information retrieving steps, making them faster and accurate.
And finally, there you have the very logical step 4.
Intuitively enough, you now need to proceed at this very simple equation:
(cash flow) = (money received) - (money spent)
The result can be either positive or negative, so let's see how to explain both cases.
Having a negative cash flow means one main thing: your company is not in a strong financial position and may be in need of external funds, either from investors or as a result of a bank loan.
However, before choosing the external solution to the problem, you may consider some key actions aimed at reinforcing your company financial position over time.
In fact, no matter how much funding one business can possibly get, nothing beats being financially on top of the situation.
A few key actions you may consider are the following:
When you have a positive cash flow, your business is in a good financial position and have no evident issues in terms of liquidity.
There are a few things that you can actually afford to implement and that we strongly suggest, either for your business growth and for your peace of mind.
And of course, last but not least, make sure your company will keep on being on top of its cash flow, because financial solidity does pay off greatly and shall be protected once it's there.
In this article you've learnt a faster and result-driven method to measure and calculate your cash flow, so you're ready to jump to the interpretation part in order to come up with some great next steps laid out for your business.
Once again, we want to reinforce the concept we introduced at the beginning: cash flow is one of the most powerful - if not the most powerful element - for any business.
According to how great your business vision is, you must focus on cash flow starting right here, right where you are now, because your financial position is going to come into play at some point and the result of this little indicator will make a huge difference.
Keep yourself driven and focused, and if you find that you could use some extra knowledge on this topic feel free to reach out to us at firstname.lastname@example.org.
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