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How Important Is Cash Flow?

Cash flow refers to the currency flowing in and out of the organization in a thirty-day period. While it may appear that cash flow only works one way—moving out of the company—the movement does work both ways.
• The currency will come from clients or customers purchasing your services or products. For those that do not pay immediately after receiving the service or acquiring the good, it means that some of the business cash flow will come from accounts receivable collections.
• Cash will go out of your company in the form of business expenses, e.g., mortgage or rent payments. Other cash outflows include tax payments and accounts payable.

Real Cash Vs. Cash

For certain businesses such as those in the hospitality industry, cash refers to paper money and cash currency. Restaurants, for instance, take hard cash from their clients and in some cases use this cash to pay their bills. This type of cash-based businesses will normally have distinctive issues related to tracing their cash flow.
This is more so because it may not be possible for them to track all their income unless there are formal documents and invoices.
Note: Cash-based businesses are often at a higher risk of getting audited by the IRS as it is easy for them to hide their income and fail to report it to the tax authorities.

What Makes Cash Flow Important?

Many businesses fail for lacking access to cash. According to the Small Business Administration, the reason why many start-ups end up failing is that they tend to have insufficient cash reserves. Running out of money will easily lead to the closure of your business.

Opening a Business

There is nothing more difficult than trying to handle cash flow issues during your initial days. Chances are that you will have recurring expenses that must be paid, yet your money will continue to run out fast. In the start-up days, you may lack enough paying customers to keep you afloat.
This means that you have to source for cash in other places. Investing in stocks & shares ISA and looking for a temporary credit line are some of the options that can help keep you going.

Seasonal Businesses and Cash Flow

Seasonal businesses are businesses that will experience a large fluctuation at certain times of the year, e.g., during the summer or during the holiday seasons. This kind of business will need access to good cash flow. While managing the flow of cash in a seasonal business is a tricky undertaking, it can still be done, but it will require you to apply lots of due diligence.

Cash Flow Vs. Profit

Can a business lack cash flow and still make a profit? How does this even happen? The reality is that profit is always regarded as a concept used in accounting and bookkeeping. Cash, on the other hand, as has been explained above refers to the coinage that the business has in its checking accounts. It is possible for an enterprise to have assets, e.g., accounts receivable, but when the money is not collected, it means that there will be no cash flow.

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