The money which is flowing or moving in and out of business in a month is referred as cash flow. Although sometimes it seems that the cash is flowing in only one way –out of business but actually it flows or moves both ways. Cash is coming in from clients or customers who are purchasing your services and products. If in case clients are not paying at the time of purchase, cash is flowing in from collection of receivable accounts while it is moving out in term of expenses such as rent, mortgage, loan payment on monthly basis and in tax payments and several other payable accounts.
One can think of 'cash flow' as a big picture of business that keeps track on the account. Cash flow can be in two forms: positive cash flow and negative cash flow. You are in positive cash flow, if the amount of money coming in is more than going out as you will have enough cash to pay your bills. On the other hand, if the cash flowing in is less than the money moving out then that is considered as negative cash flow and then you are in danger of being overdrawn. And if this happens then you need funding source to cover your overdrafts. That the reason, why startup business require working capital, in loan or line of credit form in order to cover shortages in cash flow.
Why Cash Flow Is So Important
One of the biggest reasons for failure of small businesses is the lack of cash. The administration of small business says that insufficient cash reserves are some top reason due to which startups businesses don't succeed. This process is called running out of money and it can shut down your business faster than anything else. Cash is essential for running your business as you get payment option for various expenses such as stocking raw materials, salary of employees, office rent and other operating expenditure. In fact, positive cash flow is good as it indicates that your business is running smoothly. Also, when it occurs in large amount, cash flow is better as it will permit you to do other investments such as hire new employees or open branch on other location and helps in growing your business further.
Cash Flow When Starting a Business
When starting a business, one of the most difficult issues is dealing with cash flow. There is a possibility that you might have so many expenses and your money may be flowing out fast. Also, you might have no customers or sales that are paying you back then there is a need of temporary cash sources such as a temporary line of credit which help you in continuing your business towards positive cash flow situation. Particularly, cash flow is vital for seasonal businesses that have a huge fluctuation in business transactions at various times of the year. In this type of business, managing cash flow is quite tricky, but can be managed with diligence.
Nowadays, business landscape has few mandates that small businesses should go global. But doing business with trading overseas partners might be risky. For this problem, credit insurance will help in mitigating the risks by protecting the receivables’ value. Over the decision of conducting cross-border business, one can breathe easily by guarding bottom line against slow payments pr even nonpayment of invoices. Credit insurance can also be used on the basis of case-by-case. Actually, growth can also bring serious problems to a business, depending upon the type of growth. Like few entrepreneurs all growth is good but getting a single large order or growing sales too quickly can result in serious cash flow problems. And these issues are enough to derail your business permanently. Most businesses encounter cash flow problem but it can be prevented with the right strategy. Furthermore, the best way of keeping track on your business cash flow is to run a cash flow report. And cash flow should be managed wisely for better supply chain management as it will help in creating strong as well as healthy business.