Cash flow is typically the net amount of cash or cash-equivalents that move in and out of an enterprise. Positive cash flow shows that a business’s liquid assets are gradually increasing. It enables a business to settle its debts, to reinvest part of its revenue, prepare for future expenses, as well as paying dividends to its shareholders.
Cash flow indicates a company’s change in its financial position during a particular period. If one receives more cash than they give out, they are said to have a good cash flow.
Here are three of the most basic reasons understanding cash flow is good for your business:
Following Up Debts
Most companies typically have short-term credit and long-term loan accounts with their vendors, with each loan needing specific monthly payments. Since the obligation to make these payments run until the loan or credit line is repaid in full, it ties into the funds available for a business owner. But, because this loan (taken out as an investment to help promote growth in the business) is a consistent debt, owners are able to approach repayment with certainty as long as these debts are included in a well-formed financial plan.
Growth
Besides facilitating proper debt management, a positive cash flow offers comfort and numerous opportunities for a business to grow. It gives room for businesses to build or acquire new offices, inject capital in development and research, and upgrade its infrastructure and technology, as well as adequately train employees. Some businesses can quickly grow due to their steady cash flow. Having positive cash flow enables a business to function more proactively and strategically.
When a company is unable to get new customers and revenue sources, its growth stagnates. This decline can lead to debts becoming greater than what’s being brought in each month, causing owners to need to revisit their financial plans, business plans, and other written strategies used to help grow that particular business.
Flexibility
Understanding cash flow and where a business lies in any situation increases the time flexibility a business owner has to respond to contentious issues and to make critical decisions. With positive cash flow and time to think about the next step of a business, owners can consider buying or leasing new equipment, acquiring a competitor, building new offices and more.
Managing cash flow is rarely an easy task, which is why many business owners choose to utilize ACH services offered by banks or ACH-specific companies. Through the automatic collection of customer payments, and paying employees, vendors and other debts, these services can help handle a large portion of day-to-day cash flow transactions.