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How Your Cash Flow Can Destroy Your Business

How Your Cash Flow Can Destroy Your Business

A business’ weekly cash flow reports are often one of the most important documents for gauging how it is performing. It shows how much money is coming into your business, and then how much is being spent. It’s different than just looking at the number of invoices you have on any given week, since customers could have used credit or payment plans to pay those invoices. It’s also different than the concept of profit and loss, since a company can actually be profitable while experiencing a serious cash flow problem. Without a healthy cash flow, a company could have problems purchasing supplies or may even find that it doesn’t have enough money to pay its employees. As such, it’s extremely important for a company to keep an eye on its cash flow. Keeping close tabs on weekly cash flow reports is a crucial task, especially for many small businesses.

Using Cash to Grow a Business

Most companies depend on cash when it comes time to grow their business. For example, if production reports show that a company cannot keep up with the demand for products, it might mean that additional production machinery is needed, or perhaps there is a need to hire more employees. If a company has good cash flow, then these things may be possible and the company is able to continue growing. However, even if the company is making a profit, if there isn’t a sufficient amount of cash flowing into the company to support these expenses, then the new machinery cannot be purchased, and it won’t be possible to hire more employees.

Predicting Cash Flow

Trying to predict cash flow can often be difficult, even if you have a good feeling for how many goods and services you will sell in a given week. This can be especially true for small businesses which are highly dependent on several large customers. All it takes is a week when these customers do not pay their bills on time to cause a serious cash flow problem. Since you don’t really have control over when a customer will pay a bill, you don’t really know when you will have the cash. This can make it quite difficult when it comes time to depend on this cash for business growth.

Using a Weekly Cash Flow Report

Using a weekly cash flow report is one of the best methods for keeping close tabs on your available cash. A cash flow report will consist of three sections – operating activities, investing activities and financing activities. Operating activities consists of all transactions that determine operating income, such as cash receipts and all your cash payments, such as for inventory, rent and payroll. Investing activities include transactions for things such as equipment, land and buildings. Financing activities includes the payment of stockholder dividends and any borrowing that has taken place. The net cash flow from operating activities can be calculated using either a direct or indirect method. However, most small companies find that the indirect method is more useful. By examining the cash flow report on a weekly basis, small companies can often discover and remedy cash flow issues before they become big problems, thus allowing them to continue growing their business.