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Cash flow is defined as the incomings and outgoings of cash pertaining to the operating activities of a business. For example, a business’ incomings are the receivables (payments) from customers and clients, while its outgoings are its expenses, such as payroll and leasing office space.
The general concept is easy enough to understand, but properly managing cash flow is vital to handling day-to-day operations. It can be the difference between your business heading down a path to success, or being in the red.
However, the level of cash flow generated by your business is not necessarily an indicator of performance. For example, high levels of positive cash flow do not necessarily mean high — or even any — profit.
Consider these six potential sources:
Assessing how much cash you have presently is a good first step, but it’s also important to anticipate how much cash you’ll have — and need — in the future.
Projecting your cash flow will help you answer important questions, such as:
In order to do this, you need to estimate your future sales, your cost of sales, changes to payroll, timeliness of receivables, timeliness of payables, and any potential loans or equity contributions that can serve as funding sources in addition to the cash generated by your business.
A cash flow statement — or statement of cash flows — is a financial statement that helps you analyze the cash flow of your business in a given time period. It tracks your beginning cash balance for every month, then tracks your inflows and outflows. You can find an example here. This type of report is a standard type of financial reporting that has a view of how you have performed in the past.
An important tool for a business owner to use is building a projected cash flow statement. It uses the same principal as the cash flow statement, but is more forward looking and can prepare you to manage the future growth of your business more effectively.
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