So, what is cash flow? It’s basically the movement of funds in and out of your business. Typically, businesses track cash flow either weekly, monthly or quarterly. There are essentially two kinds of cash flows:
Positive cash flow: This occurs when the cash entering into your business from sales, accounts receivable, etc. is more than the amount of the cash leaving your businesses through accounts payable, monthly expenses, employee salaries, etc.
Negative cash flow: This occurs when your outflow of cash is greater than your incoming cash. This generally means trouble for a business, but there are steps you can take to fix the negative cash flow problem and get into positive zone. Cutting business expenses is one of the quick fix, we’ll discuss more strategies in detail soon.
These critical numbers tell you just how much is coming in and how much is going out of your business. Making more than you’re spending? It’s all good. Cash flow regularly edging into the negative zone? Not so good.
Profit Does Not Equal To Good Cash Flow
You can’t just look at your profit and loss statement (P&L) and get a grip on your cash flow. Many other financial figures feed into factoring your cash flow, including accounts receivable, inventory, accounts payable, capital expenditures, and taxation.
Effective cash-flow management requires a laser focus on each of these drivers of cash, in addition to your profit or loss. Rules of accounting define Profit simply as revenue minus expenses. However, a smart business owner understand the fact that whether you earned a profit is not the same as knowing what happened to your cash.
Find Out Your Breakeven Point
You should know when your business will become profitable, not because it will affect your cash flow — because it won’t — but because it gives you an early goal to strive for and a ready-made target for projecting future cash flow. Negative cash flow and negative profits make for a grim combination. Focus your efforts on managing your cash flow with an eye toward reaching that moment when you realize your first profits.
victorgrant replied
403 weeks ago