Accounting is one of the most complicated pieces of a business. This is especially true as a business grows. Aspects such as assets, liabilities, debts, costs, revenue, and profits must be accounted for in both their monetary and non-monetary forms. Of course, looking at these components of a business is important for estimating its value. However, according to Investopedia, this estimation of value can be misleading as it often obscures one of the most essential pieces of a business’ long-term sustainability – cash flow.
What is Cash Flow?
Cash flow, at its simplest, is a measurement of the money that goes in and out of a business. It ignores non-monetary, unpaid, and pending assets, revenues, debts, and liabilities. The primary objective of measuring cash flow is to get an idea of the amount of money available for spending. This includes money received from customers, bank loans, investments, and shares.
It is important to note that any money that has not yet been transferred, i.e. accounts receivables or unpaid bills, are not included in measurements of cash flow. Income and expenses are only measured when the money has been received or paid.
Cash Flow and Growth
Working Capital
In a recent article, we discussed signs a company is ready for growth. One of the qualifiers was working capital. Capital, or cash, allows a business to hire more people. This often leads to more effective and efficient work, and consequently, more growth. Additionally, cash gives businesses more avenues for marketing and better tools for managing daily operations, further increasing reach and efficiency.
Most importantly, working capital allows a business to do basic upkeep of its services and products. This is especially important for brick and mortar businesses that have high overhead. Lack of cash tends to stifle a business’ ability to sustain itself, which decreases a business’ ability to jump-start or maintain growth. A lack of working capital also tends to scare off potential investors and lenders, which can lead to a downward spiral of insufficient funds.
As such, it is crucial that you regularly review your books to ensure that the income generated by your business is higher than its expenses. Otherwise, a lack of cash could lead to critical issues later down the road.
Final Thoughts
Accounting is a complex, but extremely important part of maintaining a healthy, growing business. Cash flow is no different. Remember to keep a close eye on the funds that go in and out of your business. The present and future viability of your company depend on it.
Remember, running a business successfully does not need to be complicated. Keep it simple!
For more interesting topics to help you successfully manage the challenges of growing your business profitably, please search our blog at our website www.portalcfo.com.
Manny Skevofilax is a consultant and speaker that helps his clients successfully navigate the challenges of growing their businesses profitably. Since 2003, Manny helps businesses enhance their results by using his experience in strategic planning, financial statement analysis, operations, organizational development, and team-building. His consulting firm, PORTAL CFO Consulting, Inc., has attracted clients from diverse industries in the United States and abroad.
Manny can be reached at 410-808-3441 or via email at manny@portalcfo.com.