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Don’t confuse profits with cash flow
Profits and Cash flow are two completely different things. Your income minus the expenses constitutes your profit. But when you consider all income, it does not represent cash in. For example, you made a sale bu the customer has not yet paid you, but that’s still considered as income. Likewise, your vendor has delivered supplies for which you you won’t pay until he bills you. Even so that is an expense. So an income statement, does not tell anything about your cash flow. Without control even profitable businesses run out of cash sometimes.
What affects Cash flow?
Companies have their finance management and running costs. They need to pay rent, often in advance and contrarily they allow their good customers credit up to 60 or even 90 days. This reduces cash flow but not the costs. Hazards, damages and thefts are other contributors to the costs. Cash flow decreases accordingly as costs increase.
Know how Cash Flows IN & OUT
Its a rule of thumb that cash should flow in faster than it flows out. The sources through which cash flows in are Cash Sales, the collections of accounts receivable, which is money from sales you have made but were not paid for immediately, and the capital or cash you put into the business.
Cash flows out for the purchase of goods and services, accounts payable, salaries and benefits, taxes purchase of equipment, rent deposits and and loan payments.
How Cash Flow Projections can help
Cash flow projections are useful in that they can alert you from the the foreseeable pitfalls. Getting the numbers together may not be your forte, but you still need to understand the principles. Cash Flow projections should be done once a month at least and if you are reaching the point of insolvency, a weekly or daily projection is a must. You cannot predict the revenue part of it but you can surely see how cash can go out. Make sure you take into account expenses like insurance premiums, membership fees which may be falling due.
Make a Realistic Finance Management Estimate
Base your cash flow projection on real market research, never rely on assumptions. You can also take the advice of experienced peers and mentors in your line of business. Once you have a reasonable estimate conjecture what your cash flow would be if sales were 10- 20 percent higher or lower than projected. Also take into account what would happen if customers don’t pay on time.
A cash flow projection is your traffic signal to finance management. Heed the red light and take appropriate action. It saves many a situation. Don’t assume that it will all be a smooth flow, or that it will move consistently in the same direction. Control it with care to detail. You will be a more confident business person.
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