For a business of any size, it is essential to have cash on hand. It is always tough to survive but to expand, so it is key to understand the flow of cash. If you have cash shortages, it is pivotal to learn how to responsibly free up capital and to invest it in the right way. The amount of cash you have on hand is instrumental to how your business can go. Most companies want to expand and make more money, if you do you should follow some of these steps to free up cash and stay clear of shortages.
Cash Flow: What is it?
The concept is simple, but cash flow confuses a lot of people. The key thing to know about it is that it is different than profit. Cash flow refers to the money that you have at any given time, what you can spend on bills and expenses. It is always important to keep money in the bank. If you have more money in the account to cover your bills, you have positive cash flow. When money is leaving the company faster than it is coming in, there is an issue. While cash flow is always a dynamic issue, there are ways you can avoid shortages and keep money around for when you need it to the most.
Accounts Payable vs. Accounts Receivable
Another important detail is the difference between accounts payable and accounts receivable. The former symbolizes the assets like your bank accounts while the latter is the liability like payments you owe. Accounts payable is the money that you owe and include employee payroll, bank loans, and anything that else that you can consider an expense.
Accounts receivable is an asset that accounts for the money coming into your business. This is can be money you receive from customers or any other money that comes into the business. Receivable accounts can be from loans paid back or interest that you incur. Knowing the difference between these things can make a huge difference to your company. They are an important part of calculating the profitability of your business.
The profitability of the business in question can be determined by adding up all of your accounts receivable and subtracting the accounts payable. When the result is positive, you have healthy cash flow and when is negative when you don’t have any money left over. This is where the distinction between profit and the flow of cash. You can be making a profit and still have no cash around because it is tied up in other assets.
Dealing with Shortages
According to the site MoneyPug, which is known for being a platform for payday loans, the most common way to deal with cash flow is to take out a loan. This isn’t necessarily the right thing to do, however. Using this kind of finance option can be helpful, but you have to stay out of the cycle of debt. Short-term loans can be a great way to pay for a certain expense or to cover an unexpected fee but you should use it to catapult yourself ahead as a business, not as a crutch to solve the problem of cash flow in general. Loans will not solve your cash flow problems, but they can help in the moment.
When you’re having cash flow problems, you should look at the systemic issues. It is important to make a strategy and stick to it. The first step is to use software and build reporting features that can analyze the cash flow of your company. Developing a plan to increase cash flow will be much easier. Shortening the conversion period will bring in money faster. Expansion is important to any business. You may need one or more injections of cash during the growth phase, but this can get you in some trouble.
Whatever your business is and however big the company is, you need to expand to thrive. If you don’t have money on hand, you won’t be able to grow and make more money every year. Take the steps to realize what you need to do to keep your cash flow in check and you will be able to break free from cash shortage problems.