To ensure your business is operating as effectively and efficiently as possible, it is important to be on top of your cash flow.

The first step in monitoring your cash flow is knowing exactly what cash flow is. Business owners need to know the difference between profit and cash flow. Keeping an eye on both of these is essential for success, but they are different and it is critical to understand the difference.

Profit is the amount left once expenses are subtracted from revenue. The higher the number, the better. If costs exceed overall revenue, then the company has made a loss. However just because you have made a profit doesn’t mean you will have money in the bank.

Cash flow is the amount of money coming in and out of your business. It is equally as important as profit when it comes to evaluating a business’s performance. Positive cash flow indicates that more money is being brought in than is spent. If cash flow is low, it can be caused by overspending or carrying too much stock or the owners taking too much. Fast-growing businesses often need more money to cover costs like hiring employees and purchasing stock, so it’s essential to keep an eye on your cash flow.

Why is cash flow monitoring important?

1.) Strategic planning

Cash flow is an incredibly important part of any business, and keeping track of it is paramount to the success of your business. Making sure you have an accurate cash flow statement means you can make better plans and decisions rather than ‘running blind’.

Your cash flow statement can help you identify areas where you may need to cut back or where you have opportunities due to extra funds. Keeping a close eye on your cash flow can ensure long-term success of your business.

2.) Know where you are spending money

To best understand where you are spending money, you should be tracking your cash flow monthly. This will give you a clearer picture of your current spending habits. You can use budgeting software to track your cash flow more accurately. With the right tools, you can gain a better understanding of where your money is going and make changes to improve your cash flow.

3.) Avoid insolvency

If your business does not have enough cash to cover its needs, it can quickly become insolvent, leading to bankruptcy. By monitoring cash flow, you can identify potential issues before they become serious and take action to remedy the situation before it’s too late.

4.) Keep business operations running smoothly

A business that does not have enough cash flow can be forced to make cuts in other areas, such as marketing or research and development. This can slow the business’s growth and negatively impact its ability to compete in its market.

5.) Know you can cover the bills

Tracking your cash flow ensures that you are always able to pay suppliers on time and in full and allows you to plan. This way, you can better manage your cash flow and make sure you have the funds available when loan payments are due. Additionally, always paying your suppliers on time as will strengthen your business relationships, as your suppliers will know when to expect payment and you can avoid potential disputes.

Managing cash flow is crucial for the survival and success of any business. Business owners who stay on top of their cash flow can avoid financial difficulties, maintain positive relationships with suppliers, keep operations running smoothly and make strategic decisions for the future.

For more information get in touch with your advisor.