Are you running a successful business? But wait, how are you so sure about its success? Today, more than ever, businesses of every size have become dynamic. But, unfortunately, there’s no one measure to define the actual success or its profitability.
This is where the concept of cash flow arrives as a standard, universally accepted measure of success and scalability in business. Without a proper cash flow running through multiple levels of your operations, you cannot expect your business to make it in the long run.
Believe it or not, you can run out of cash while your business is very profitable.
Yes, it’s possible for your business to run out of cash. Here, you have to think of cash flow as the blood running through the arteries of your organization. You use it to do those essential things that keep your operations active and running. Therefore, for this reason, many business owners maintain a regular cash flow analysis. But, what is it exactly?
What is Cash Flow Analysis?
To make it easier for you to understand, the term “cash flow” represents the flow of cash, or the movement of cash, in and out of your organization.
Now, talking of ‘Cash flow analysis,’ it is the process that helps evaluate the flow of cash that moves inside and outside of your company, highlighting all the resources that it came from. The goal of analyzing a cash flow is to allow business owners to trace the origin of the money and track where it goes. This way, organizations can optimize their revenue stream to maximize profitability.
Analyzing cash flow is one of the best bellwethers for organizations of every shape and size. It presents you with the entire history of your money, giving you a practical idea of your company’s position in the industry.
Basics of Cash Flow Analysis
At its initial stage, analyzing cash flow is about generating cash statements around the finances, investments, and the cash spent on regular operations. Now, let’s gather some insight into the three basics of cash flow analysis.
- Operating Activities: the cash generated from operating activities comprises the total sum received from customers, less the cash sent on operating expenses. The bucket for operating activities comprises recurring and annual expenses like utilities, salaries, rent, and supplies.
Here’s a visual representation to help you better: Operating Activities = money received from customers – Operating expenses.
- Investing Activities: As the name defines, investing activities are allocated on financial instruments and fixed assets. The bucket here includes capital or long-term investments, assets in the plant, property, or stock purchase, among other similar investments.
- Financing Activities: Financing activities can be termed as the overall funds that come to the organization. They can be from the investors, owners, or creditors. Under cash flow, financing activities are highlighted as equity, debt, and dividend transactions.
Cash Flow vs. Profit vs. Petty Cash: Don’t Be Confused!
While we’ve already covered what a cash flow is, here’s a quick overview:
Cash flow is the total sum of money that flows in and out of your business. However, no matter your total overall profit, you might have trouble maintaining inventory and operations if your cash flow is low.
Your organization’s profit is the overall money left after deducing all the costs from the generated revenue. Don’t confuse your profit with your cash flow, as profit is what’s left after reducing the expenses, and cash flow represents the overall cash acquired via operations.
On the other hand, petty cash is money required for small purchases, as and when needed. These expenses can be used for anything ranging from getting office stationery procured to hosting a general team-meet at the local restaurant.
Now that we’re clear about all the essential terms revolving around the money inside an organization, let’s move on to the perks of maintaining a cash flow.
Perks of Maintaining a Proper Cash Flow
- Scope for Better Plans and Decisions: With an accurate maintained cash flow statement, you’ll have a better idea of your funds. This way, you can reallocate them for the proper purpose at any given moment. Knowing where your funds are, plays a significant role in running a business because it helps you utilize business opportunities coming your way.
- Track all your Money in the Business: With an effectively managed cash flow, you’ll have a better understanding of your organizations’ overall expenses. Further, it gives you an idea of the overall money that came in, the overall costs, and the profit obtained. This way, you can optimize operations to cut down on unnecessary expenses at the hour of need.
- Gives you the Time and Tools to Protect Business Relationships: When you maintain your cash flow precisely, it gives you the time required to collect the necessary funds for your business.
Maintaining a seamless cash flow is as necessary as running everyday operations. You cannot ignore how it simplifies operations at multiple levels. When done accurately and precisely, cash flow analysis becomes a future-proof solution for running a successful business.
Remember, the more frequently you analyze your cash flow, the better you’ll be able to manage operations.