Understanding cashflow
Why is it important to understand cashflow and its key role in the success of your business success?
Because without this knowledge, it can be very difficult to ensure your business survives and thrives!
What is cashflow?
Cashflow is the amount of money entering and leaving your business over a given timeframe.
It enables you to meet existing financial obligations and plan for the future, and it is an essential aspect of every business.
Read on to learn key strategies to help you manage your cashflow effectively, then get in touch if you’d like our help to implement these strategies.
The key to understanding cashflow, is to understand that cash is king!
Cashflow is a significant factor in the success of any business. It drives everyday operations, expansion and purchasing power.
You have positive cashflow when you have more money to pay bills. Conversely, cashflow issues occur when money flowing out exceeds money coming in i.e. negative cashflow.
Positive cashflow is necessary for daily business operations including:
- taxes
- paying employees
- purchasing inventory
- allowing you to forecast expenses
- preparing you for dryer months
- charging clients
However, cash flow is also the number one reason small to medium enterprises (SME’s) fail.
In fact, 82% of SME’s fail due to poor cashflow.
A business’s success depends on generating profits while operating with a positive cashflow, highlighting the importance of cashflow and profit as crucial aspects of running a business.
Business turnover can be misleading!
A healthy business turnover does not necessarily mean your business is in fine shape financially.
Cashflow is more critical than turnover, as most SME’s are fully aware, which is why cashflow management should be at the forefront of your mind.
Why is cashflow management so important?
A consistent, positive cashflow enables your business to grow and invest in new opportunities.
Cashflow management strategies
Putting these eight cashflow management strategies in place today will invest in the financial health of your business.
- Pay bills strategically
- Choose a suitable payroll cycle
- Negotiate your payment with suppliers
- Collect receivables quickly
- Manage your credit policies carefully
- Use a business credit card
- Consider a line of credit
- Use technology to make and accept payments
Positive Cashflow management requires the following:
- constant diligence
- regular reporting
- And a firm hand on the purse strings.
Without positive cash flow management your business could be heading down the slippery slope of:
- insolvency
- liquidation
- diminished profit margins
- and debt.
Drumm Nevatt & Associates are a collective team of qualified Chartered Accountants in East Auckland and Tauranga.
We are highly skilled and trained in all aspects of business accounting and taxation and can provide specialist financial advice tailored to your business, including assistance to help with understanding cashflow.
Get in touch today to discuss how we can help you put strategies in place to effectively manage your cashflow.
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