Profit Does Not Equal To Good Cash Flow
You can’t just look at your profit and loss statement (P&L) and get a grip on your cash flow. Many other financial figures feed into factoring your cash flow, including accounts receivable, inventory, accounts payable, capital expenditures, and taxation.
Effective cash-flow management requires a laser focus on each of these drivers of cash, in addition to your profit or loss. Rules of accounting define profit simply as revenue minus expenses. However, a smart business owner understand the fact that whether you earned a profit is not the same as knowing what happened to your cash.
Managing Small Business Cash Flow is Simple... With this Tip!
Positive cash flow: This occurs when the cash entering into your business from sales, accounts receivable, etc. is more than the amount of the cash leaving your businesses through accounts payable, monthly expenses, employee salaries, etc.
Negative cash flow: This occurs when your outflow of cash is greater than your incoming cash. This generally means trouble for a business, but there are steps you can take to fix the negative cash flow problem and get into positive zone.
Despite the fact that cash is the lifeblood of a business, the fuel that keeps the engine running, most business owners don't truly have a handle on their cash flow. One way to keep that situation under control is by tracking your cash flow results every month to determine if your management is creating the type of cash flow your business needs. This also helps you get better and better at creating cash flow projections you can rely on as you make business decisions about expanding your business and taking care of your existing bills. Your cash flow troubles aren't going to fix themselves, so it's best to have a plan and be proactive.