How to Define Cash Flow in Your Business
How much is your business worth? There are many ways to determine the value of your business and many reasons to determine it. One way to consider where your business stands financially is cash flow. Understanding the amount of cash that is available for immediate use is essential when planning for your immediate and long-term goals.
Your cash is constantly moving in and out. Just as you receive a payment, much of this money is earmarked for use. When you look back over a specific time, whether a month or a year, you can determine the flow of your cash going in and out.
Cash flow can be described as positive or negative. A positive flow means that, on the whole, you’re receiving more than you’re spending. Negative, of course, means that you’re spending more than you’re receiving. The danger of negative flow of cash depends on the period you’re focusing on. A week of negative flow is far more manageable than an entire year.
While the principle seems straightforward, it’s complicated by a few factors. First, loans, lines of credit and credit cards add another dimension. Because of these flexible forms of cash, your business can operate for far longer at a negative flow. Large amounts of outgoing cash isn’t a bad thing if it’s being used to improve your income in the long term.
Delayed payments also complicate cash flow issues. For some businesses, you receive the full payment before shipping a product or delivering a service. For many large and small businesses, however, invoices are typically sent later and not required to be paid for 30, 60 or even 90 days. This can skew the results of a simple, short-term view of the flow of your cash.
For these reasons, it’s best to look at the flow of your cash in a number of ways. First, you can view it on a daily basis. This gives you an idea of the amount of cash you need to have on hand every day to operate efficiently. Second, you can look at your flow on a monthly basis. Finally, for many businesses with large amounts of working capital, yearly estimates are the best way to get an accurate picture of your overall financial situation. If your business is struggling with low cash flow, consider choosing a financing option to boost your working capital and keep your business responding flexibly to your daily expenses.
