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What is Cash flow and How to Effectively Manage it?

Cash flow is a measurement of the amount of money that flows into and out of your firm during a specific time period. When you have positive cash flow, you have more money coming in than going out, allowing you to pay your bills and cover extra obligations.

When you have negative cash flow, you can’t afford to make those payments. The concept of having “enough money to meet your financial obligations” is also known as working capital.

Why Does Cash Flow Matter in Businesses?

In simple terms, financial management begins and ends with money. If you don't have enough cash on hand to meet your company's needs, you'll run into problems. Managing your cash flow entails determining when you'll have cash in your hands, determining how to get more of it in your hands faster, and understanding how to manage your expenditure so you don't run into cash flow problems.

Learning to manage cash flow is a foundational building block for managing your business finances. If you’ve got that down, then you can start thinking about how to really grow your business and improve your margins and profit.

Let’s take a look at several ways to better manage consistent cash flow as a business owner:

Figure out your breakeven point

Any good business owner should know when their business will become profitable. This will not necessarily affect cash flow, but it will give an early goal to strive for and a target needed for projecting future cash flow. Negative cash flow and negative profits make for a depressing combination, that is why knowing your breakeven point is so important.

Up-to-date Accounting System

To manage cash flow, you must have an accounting system in place that is kept current, meaning data is processed frequently to be able to determine accounts payable aging, accounts receivable aging, liabilities, and actual cash in hand. Reviewing these balances regularly can help you in determining your business cash flow, trends, and opportunities.

Set your price and fees appropriately

First off, be careful in setting your pricing/fees. If you offer a service that your competitors do not, don't hesitate to price your services at a premium. Second, use digital invoicing with online credit card payment to assure quick payment. The slight loss to a credit card fee is more than offset by quicker collection. Third, obtain a commercial line of credit from your bank to fill in cash needs during slower times of selling.

Hire a financial expert

Hire a professional to manage your cash flow. As a business owner, delegating this responsibility to a bookkeeper is absolutely necessary. Not only does the decision to delegate free up time, but a financial expert can introduce new perspectives that you wouldn’t have otherwise as a CEO.

Assess Risks Frequently

It is essential to evaluate your circumstances on a regular basis. You must continuously ask yourself if you, as a business, can afford to make a given payment without taking any risks. If there is no danger, you should aim to pay as much in advance as feasible. If there are any dangers, even if they are minor, you should consider if you have the financial means to make the payment. Making certain that you can pay everything off on time or early will ensure that you see your gains rather than waving them goodbye when you have items to pay off.

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