Cash Flow 101: What It Is, How to Calculate, & Definitions to Know
Learning how to manage your cash is a crucial skill that will be a major contributor toward the success or failure of your small business.
Having clarity of your cash flow allows your business to create a plan of action around the entire organization — from headcount planning to additional funding. Knowing if you have cash available to invest is extremely important.
Mastering Cash-In and Cash-Out.
Being able to accurately forecast your cash flow is extremely valuable for businesses. An accurate cash flow forecast will let you know if your business has enough cash to run the day-to-day operations and also if you have enough to grow the business. There are five steps necessary to accurately forecast your cash flow.
Calculating your free cash flow is important to understanding how your business is functioning and whether it can continue operations. There are traditionally three ways to calculate free cash flow, which will all lead you to the same information you need. Which of the three calculations you use will depend on what type of information is available to you in your size of business.
If you have a healthy cash flow, that means you have enough money at the end of the determined period (usually monthly).
Managing cash transactions is the easy part of accounting. But what happens when you have to include credit? That’s where accounts receivable and payable come in. These are tools used in the accrual accounting process.
Accounting can be an intimidating aspect of owning your own business. Luckily, there are a lot of great resources to help better manage this area. If you want to tackle accounting on your own, there are some great accounting tools out there ready to help. Platforms like QuickBooks, Freshbooks and Xero offer affordable web-based accounting solutions. If you are not into doing your own accounting, there are plenty of Certified Public Accountants in your area that would be more than willing to help.
It’s essential to have an understanding of how money comes in and out of your business. With this knowledge, you can have a direct impact on how profitable your business is. Keeping your business cash flow positive allows money to be reinvested into your business for future growth, which is the goal for every company!