Why It Is Essential to Calculate the Cash Flow in Business

kokil Garg

For you, as an entrepreneur, it’s essential that you understand how cash flow works in your business field, so you don’t end up sending it in the wrong direction. The best way to maintain the cash flow in the business is to try the free collection management software. The basics of cash flow include a few simple items:

  • Assets are the things that your business owns. You probably have a computer and that is an asset. Any invoices you’ve issued but have not received payment for are also assets.
  • Your company also has liabilities. These are bills that you owe to someone else; money you owe on any credit cards, bank loans, or outstanding bills. Assets minus liabilities equals equity. This is what your business actually owns. If you financed that computer and have paid 50 percent of the bill, you own half of the computer.
  • Cash coming into your business is called revenue, income, or sales. These all mean the same thing. Cash going out of your business is called expenses. These are the bills you have to pay to operate your business like your rent and telephone. You probably already know that income minus expenses equal profit, but what you may not be aware of is that you can`t count on that profit to run your business. Such a situation is called “Cash vs. Profits Dilemma.” Here is a simple example:

Let’s say you are a DVD player reseller. You don’t have much cash, so you get a DVD supplier to sell with the 30 days payment delay. The purchase price is 70$. After receiving the product, you find out that it is not the highest quality, and the only way to resell it for a profit is to change payment terms for your customers. So, you sell DVDs on credit for 100$, with the money due in 45 days.

Now you can see that even though you have made a profit on paper, you still don’t have any cash on your hands, so to keep business going, you will need to borrow money somewhere else. Also, let’s not forget different marketing, transportation, and administrative costs, which you have to cover on a daily basis. Without any cash infusions, your venture will soon be dead.

Invest In The Accounting Software

So how do you get a handle on what shape your business is in from a cash flow perspective? For starters, you need a good record-keeping system and a strong Business Plan. There is plenty of different accounting and planning software available to small businesses, which will save you a lot of time and money.

The cost of this planning and tracking software is relatively small, as this is only a one-time investment, but the value to your business is essential. Though, some people use the old-fashioned way, keeping all their records manually. The free collection database software helps in maintaining the record of account payable and account receivables.

In your record-keeping system, what’s important is knowing how much money people owe you, how much money you owe, and your cash on hand balance. While writing your Business Plan or making some future budget decisions, you must also pay close attention to all the things mentioned above. Think of it as a road map, which will help you to reach the final destination, when you have a business up and running.

You also need to know the rolled-up totals of your income and expenses for each month and year. Still, financial tracking and reporting are not a once a year event aligned with the ritual of doing your taxes, and it is important to check these figures regularly, on a weekly basis.

Keep Track On Your Financial Position

Businesses that are successful know their financial position and track it on a regular basis. They also have a plan and a budget in place, which is used as a guide for the companies future development. Businesses that are not successful do not have all these things. Without fail, this has held true in my experience working with small business owners over the years. You simply must know where your business is from a financial perspective and where it is going. You can keep track in your financial position with the help of accounts receivable software.

Keep Your Personal & Business Account Different

The number of businesses that fail or never come close to their profit potential is shamefully high and almost always avoidable. Frankly, many business problems are caused by personal problems. If the business owner does a poor job of managing his or her money and time, then they will most likely make similar mistakes in their businesses.

However, also contributing to the failures of most businesses is the fact that the vast majority of people, even highly educated ones, are uneducated concerning the foundational principles of business management. You should integrate the business account with the free collection software.

If you break the laws of business, then the laws of business will break you. However, the opposite is also true. If you obey the laws of business, then small business ownership can also produce tremendous financial rewards.

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