Previously I have told you what is Cash Flow Management . Today I will let you know why cash flow management is important for any business.
“Revenue is vanity, cash flow is sanity, but cash is king”. Well, it is right no doubt.
The business analyst states that the poor cash flow management is one of the main reasons for business failure. It is the most stumbling hurdle that blocks the smooth running of the business. Understanding why cash flow management is important will help you predict unforeseen tragedy.
Confusion between Profit and Cash Flow
No! Cash is not profit. It is generally mistaken that cash refers to the profit earned in a business. Profit is the revenue generated from sales of product and services. Cash flow is the estimation of difference between cash received and cash used on the monthly, quarterly or yearly basis. It is the real measure of Cash coming in and flowing out.
What will be scarier if you suddenly know that you are out of cash? So it is necessary to track the cash flow in your account records to face such situation. It allows estimating your balance for the running and future projects help you keep alert for any pitfalls.
Organized Planning
A well timed and well managed Cash flow let you plan the expense you have paid or expect to pay in an organized way. Expenses like accounting and legal, permits and licenses, marketing materials, inventory supplies, office supplies, equipment, furniture etc.
It helps you determine monthly expected cash sources. These sources can be loan and investments from partners. Keeping the cash record of sales history predicts the cash going to involve in future sales. The accurate estimate of cost projects the capacity to close sales that are not providing any benefit.
Pay Bills Smartly
Cash flow management gives you the advantage to paying your bills in a timely manner. If your cash flow is positive your worries for payment of bills fade away. Management accountant deals with all of your cash issues and ensures that enough cash is available to pay your certain bills and outstanding debts in the given time.
Liquidity
Liquidity is the ability to pay short-terms debt obligations. In the case of having adequate liquidity firm can pay its current liabilities i.e. accounts payable. The cash flow management will allow you to determine liquidity. It is important for a business to do so because measures of liquidity determine your cash position.
Budget Planning
Cash budgets are prepared by the companies on monthly basis to estimate cash needs of the projects or other business operations. Cash flow management helps build a financial report and to set targets for cash to anticipate needs. It helps to predict possible future scenarios and to test your assumptions.
Surviving Loan Situations
Cash flow allows collecting payments so you have enough cash to get through your lean months. It estimates and projects the reserve cash to avoid this problem. Cash flow is important for the health of the business and reducing risk and stakes of its failure. It would be better to have a positive cash flow always.