The importance of a positive cash flow
Cash flow: one of the most commonly used business terms. But what does it mean and why is cash flow so important for your business? What exactly is a good cash flow and a bad cash flow? And what is its impact on your business?
What is cash flow?
The cash flow is literally the money flow of your company: the difference between the income and expenditure over a certain period of time.
It is a financial and extremely important indicator. It allows you to closely monitor the financial position of your company.
Many business leaders want to create profit from the beginning but a healthy, positive cash flow is much more important. Your profit may still be very high but if your company has a poor cash flow, it may go bankrupt the next day, so to speak.
That's why banks primarily look at your cash flow evolution when you make a credit application. Is it positive and are the revenues higher than the costs? Then the bank will grant a loan more readily. Why? Because your cash flow reflects the repayment capacity of your company.
How do you calculate your cash flow?
It's easier than you think. All you need is a good overview of all money flows within your organization.
Cash flow = incoming cash flow - outgoing cash flow
Attention: the term "flow of money" can be interpreted here in a broader sense than
- Income from the sale of your products or services
- The payment of wages
Outgoings for raw materials
You also have to take into account money flows that circulate outside of normal business activity. Think of income from investments, capital repayments, payments of interest ...
The benefits of a positive cash flow and the consequences of a negative cash flow
Make sure that you always have a good view of what's coming into your company and what's going out. In this way, you can closely monitor the cash flow and intervene when necessary. A positive cash flow is crucial for a healthy company. It ensures that you can continue to meet all your obligations.
If you have to deal with a negative cash flow that drags on for too long, it often has major consequences for your company. Even bankruptcy is a possibility. Of course, in certain periods you will spend more than you receive. If, for example, you make a large investment, this is often unavoidable. But try to keep that period as short as possible to avoid a spiral of negative cash flow.
Everything in a row:
- Cash flow is the difference between your income and expenses over a certain period of time.
- Don't try to spend more than you earn.
Monitor your cash flow carefully because a negative cash flow is disastrous for your business.
An important measure for a healthy cash flow is to ensure that your customers pay their invoices on time:
- Provide a good invoice
- Provide clear general terms and conditions
- Keep communicating with your customer
Despite your efforts, are you still waiting for your money and your client doesn't want to pay? Then simply request your unpaid invoices via the Unpaid online platform.