Cash Flow

What is Cash Flow?

Cash flow is the amount of money, cash and non-cash, travelling into and out of a business. A positive cash flow is more money coming in than going out and a negative one is less coming in than the business needs to cover outgoings.

Monitoring Cash Flow

To calculate cash flow a business takes note of the cash available at the beginning and at the end of a specific period. The time period may be such as a week or a month. The business will have a positive cash flow if there is more in the account at the end of the period than when the period began and less would indicate a negative one.

An electrical store, for example, may have $50,000 showing in its account at the beginning of the month. Throughout the month it will make sales but also have to meet costs such as labor, utilities and loan repayments. Sales will increase the amount in the account and costs decrease it. At the end of the month the balance is taken again, showing a positive flow if above the original $50,000 and negative if below that mark.

Indicator of Business Performance

Cash flow is an important indicator of how a business if performing. If the electrical store is running a positive one the signs are that the store is well managed and meeting its obligations. The opposite is true of a negative cash flow. The long-term viability of the store may be open to question if it runs a negative cash flow for a number of time periods. The debt balance of the store will increase and creditors may question further involvement. The storeowner may also take account of their business, seeing if it requires further investment, a change in staff or stock on shelves to improve the cash flow. A store running a negative cash flow over time may need to close.

Keeping an Eye on Cash Flow

If the cash flow is negative, the store may need to take steps such as to slow payments or increase credit terms with suppliers, thus easing the pressure on the business. It may also see the need to become more competitive or change a line of stock to increase sales. A positive flow may encourage investment in the business or allow the storeowner pay off a loan quicker with a better rate. Taking account of cash flow is vital for the successful running of a business and helping the owner with better management of it.

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