In every company, money comes in and money flows out. Cash flow, in this respect, is the cash flow or money flow and a perfect tool to monitor your company’s financial position. Incidentally, cash flow can be both positive and negative. With a positive cash flow, a company receives more money than it spends. A negative cash flow means that more money goes out than comes in during the relevant period. Incidentally, the money flow is separate from the balance of the profit and loss account, as the cash flow can be negative while the company is still making a profit.
What is the importance of cash flow?
There are several reasons why cash flow is important. It is a tool that measures the money flow and is important for banks, among other things. For example, if the company applies for a loan. The bank gains insight into the company’s repayment capacity through the cash flow.
If the income exceeds the costs and the cash flow is positive, a bank is more likely to grant a loan. Insight into the cash flow is also important for the company itself. What is going on if the company is making a profit, but the cash flow is negative? This may be because there are too many outstanding invoices that are not followed up in time.
Prevent financial problems
If payments are not made, the cash flow remains negative, which can have far-reaching consequences and, in the worst case, lead to bankruptcy. This is one of the reasons why it is also so important to have good debtor management when sending and following up on invoices. It therefore perhaps goes without saying that a positive cash flow is a favourable sign. Receiving a payment for an invoice contributes to a positive cash flow in this respect.
Calculate cash flow with a simple formula
Calculating a company’s cash flow is very simple using a formula. It is a straightforward calculation where the expenses made are subtracted from the income received.
Cash flow formula: cash flow income – cash flow expenses in a specific period
What are the different types of cash flow?
Cash flow can be distinguished into three types:
- Operational activities
- Investments
- Financing
With operational cash flow, there is incoming and outgoing money related to daily business activities. If you purchase goods and pay salaries, this falls under operational activities.
For investments, there is investment cash flow, which relates to business investments. For example, expenses for computers or tools, but also income from investments, such as the sale of office furniture. When an investment is sold, it is called a disinvestment.
The third type of cash flow is financing cash flow and relates to investment expenses or income involving third parties. A simple example is providing a loan to another party or receiving a loan from a bank.
Improve cash flow with debtor management
If there is a persistent negative cash flow, it is wise to turn the tide to prevent the company from getting into financial trouble. There is a simple solution available by opting for smart debtor management such as Payt. In practice, this means it is advisable to send invoices to debtors as early as possible. It is important to agree on a clear payment term and preferably as short as possible, such as a maximum of 30 days.
If the payment has not been received after the payment term, it is advisable to follow up on the invoices as soon as possible. This also contributes to improving the cash flow position. With Payt, you can use automated follow-up. Make it extra easy for the debtor by offering the option to pay the invoice directly, such as via iDeal. Is there a long-term project or delivery in parts? In that case, it is advisable not to send the invoice only at the end, but per period. In the case of non-payment, it is also possible to arrange a payment plan.
Optimise with cash flow management software
Cash flow management software provides the opportunity to gain optimal control over the money flows in your company. Do you have a concrete and up-to-date insight into the incoming and outgoing money flows? Using cash flow software is an ideal solution for this and offers many more benefits. For example, to manage payment processes in an efficient and quick way.
Improve cash flow with inventory management
Smart inventory management is also an option to improve cash flow. With large inventories, a lot of money is tied up that cannot be used immediately. Therefore, it is wise to buy smartly to optimise the inventory. This way, the cash flow position improves, and money is available for business operations. It is also ideal to make purchases from, for example, a wholesaler and agree to pay later. The products are then already sold by the time you have to settle the bill.
Cash on hand
For most entrepreneurs, it is quite a challenge to always have a good cash flow or cash on hand. It is especially challenging if the aim is to grow the company further. More and more invoices are then sent out, but suppliers are already waiting for money. That is why it is so important to have insight into the cash flow and to optimise the cash flow. Keeping a cash book is therefore recommended.
