Poor cash management can mean failure for your business, according to research. Thoughtful consideration of basic cash flow concepts can mean the difference of success in your business. This basic understanding can also assist you in planning for unexpected events that occur often in most businesses.

Many people confuse cash as inventory. Although it is ready money and conveniently located within the business or bank, it is not considered property. It cannot be utilized to pay employees, suppliers, or rent. Profit is defined as the amount of revenue expected to make over a certain period of time. Therefore, profit growth does not make up cash on hand.

Cash on hand is a tool to keep your business up and running. It is the cash that moves in an out of your business and it is up to management to track this movement. You cannot spend profit, but you can spend cash on hand. Incoming cash includes received cash from investors, lenders, and customers. Outgoing cash involves the checks paid monthly to suppliers, employee salaries, and creditors.

A positive cash flow develops once the inflow of cash a company receives exceeds the outflow. This is one sign a business is financially healthy, but is not the only sign. When a company’s cash outflow is greater than the inflow, a company has a negative cash flow. This can be due to accounts receivable or excess inventory. A company may be faced with borrowing additional cash to refrain from serious trouble.

Good cash flow management includes being aware of cash needs. In addition to this, know the best sources to access when additional cash needs occur. This will involve sustaining of positive relationships with bankers and creditors.
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