What You Need to Know About Cash Flow
Your company’s cash flow is one of the most critical financial factors that you need to understand. If you think the money that’s coming in is more important than your cash flow, think again. Even in the event you generate a larger income, it doesn’t necessarily mean your business is doing fine. For this reason, many business owners apply for small business loans to keep their doors open.
When running a business, you have to fully understand what cash flow is and how you can manage it. Once you fully wrap your mind around that, your chances of building a profitable business become greater.
What is Cash Flow?
Cash flow is the net amount of cash or various cash-equivalents such as coins, checks or liquid investments that move in and out of a company. Positive cash flow means that a company has increasing liquid assets. Liquid assets are assets that can be easily converted to cash.
Furthermore, positive cash flow also means that a company has enough funding for its operating expenses as well as other business activities. Other business activities can include reinvestment in the business, provision of returns for its shareholders, settlement of any additional debts, and preparation for unforeseen financial crises. Conversely, negative cash flow implies a decrease in a company’s liquid assets.
Related: 6 Crucial Factors that Affect Your Cash Flow
What’s the Difference Between Net Cash Flow and Net Income?
Most people can’t tell the difference between net cash flow and net income. However, each of them has its own unique traits. Net cash flow includes the company’s actual cash and cash equivalents or its liquid assets. On the other hand, net income includes accounts receivable or a company’s outstanding invoices.
The net cash flow is used as the basis of the assessment when you’re looking at the quality of your business’ income. A company that may seem like it has a large income doesn’t necessarily mean that it has enough working capital. Its money must be in the form of liquid assets for it to obtain the capital it needs to operate.
You can also compare a company’s net cash flow with its working capital because working capital includes all of a company’s current assets and its cash. In case you’re wondering, current assets pertain to the company’s inventory and its accounts receivable.
What are the Three Types of Financial Statements?
A company’s balance sheet shows credit as part of a company’s total income. This means that the document will still reflect the items that include the money due from the company’s clients as per its accounts receivable. The three major types of financial statements used in a company are balance statements, cash flow statements, and income statements.
1. Balance Statements
Balance statements provide a clear idea about the financial standing of a specific business concerning its assets and liabilities. The term closing balance refers to the amount the company has in its account by the end of the year.
2. Cash Flow Statements
A company’s cash flow statements provide collective data pertaining to all of the company’s cash inflows from its external investment sources as well as its ongoing operations. It also reflects the company’s cash outflows that fund its operating, investing, and financing activities during any given period.
3. Income Statements
Instead of showing one day of the year, an income statement gives information on a quarter for a quarterly report or a 12-month full accounting period. In most cases, an income statement provides financial data of the present year along with two or three previous years for comparison.
How Do Companies Generate Cash Flow?
Businesses turn to external activities so that they can generate cash flow. These activities are identified as “financing activities” when they’re indicated in a company’s cash flow statement. They include the issuance of more stock, adding or changing small business loans, and repaying investors. The income that was generated from these financing activities can be compared with the operating cash flow or free cash flow. The revenues that are generated from the normal operating activities of a business are called operational cash flow.
Improve Your Company’s Cash Flow by Applying for Small Business Loans
A cash flow problem or a burn rate problem happens when a business’s future expenses overshadow its expected sales. It also occurs when a company requires more funds to cover operating expenses than it is bringing in. Cash flow problems are particularly prevalent in start-ups and venture-backed businesses.
Related: What to Consider Before Starting Your New Business
If your company has too little or no cash, you may need to apply for small business loans in order to fund your business. Although this isn’t the only way, it’s the most viable solution to solve any cash flow crunch you may be experiencing. Cash flow problems are common among businesses. However, it has to be addressed immediately to avoid other problems from surfacing.