Why is Cashflow Essential for Good Financial Planning and Management?
In our plain English guide, we explain the basics of cashflow and why it is so important.
What is a Cashflow?
In essence, a cashflow shows the movement of money into and out of your business. The cashflow does this by showing all cash coming into your business (cash inflows) and all cash moving out of the business (cash outflows), with the net position of these two balances being your business’s overall cashflow. Ideally, you will be wanting a positive cashflow, i.e., having more cash moving into the business than moving out.
On the flip side, having a negative cashflow, having more cash moving out than in, is a red flag that your business isn’t making money and may be facing financial difficulty.
Main Areas to Focus on When Looking at Your Cashflow
- Monitoring your cash inflows and outflows – this means regularly tracking your cash flows into and out of the business and making sure that it remains positive.
- Managing your debtors and creditors – efficiently managing your customers’ receipts and supplier payments is a key part of keeping a positive cashflow. Make sure that there aren’t any old balances due, either in from customers or out to suppliers, that could cause future cashflow issues.
- Getting proactive with budgeting – creating a realistic and sustainable budget and cash flow forecasts can help predict your future cash position. Anticipating future cash needs can help you avoid being caught out and having a dip in your cash position when you don’t want it.
- Being in control of stock – having excessive or unused stock ties up cash that could be used elsewhere. Keeping an optimized stock system can help avoid having cash flow issues.
- Keeping cash reserves – having an emergency fund in your bank can help to provide a cushion for any unexpected costs and unforeseen cashflow issues. This makes your whole cashflow position more stable and avoids the headaches of any future issues.
If you’d like more information on managing cashflows or would like to start producing them, get in touch with us so that we can give you a hand.
