For your business to be as healthy and prosperous as possible, you need to keep an eye on profit and cash flow. Although both are important, there are differences between them that are useful to know so you can make better-informed business decisions.
Cash Flow is the money that’s flowing in and out of your business – hence the name. Having a positive cash flow means that more money is coming into the business than going out. It’s just as important as profit when it comes to determining your business’ performance.
You might have a high overall profit but if cash flow is low, then you may still face problems like overspending or ordering too much stock. Fast growing businesses tend to require more cash to buy stock, hire employees, etc. so it’s vital to keep an eye on cash and cash flow.
Profit is the amount of money left once total costs have been deducted from revenue. Obviously, the higher the number, the better. If the costs outweigh the overall revenue, then a business has operated at a loss and is in financial trouble.
Why Staying on Top of Your Cash Flow is So Important
- Understand Where You’re Spending Money. Manage your cash flow effectively and you’ll gain a better understanding of where you’re currently spending your money, something that’s not on a profit and loss statement. It’s important to know exactly where the money you spend is going and why. It isn’t always easy to see expenditures in black and white, which is why it’s so important to manage your cash flow effectively. You might be able to identify areas of the business that you can cut costs.
- Protect Business Relationships. If you’re having cash flow problems, then you may not have the funds available to pay your suppliers. This can harm the business relationship you have with them and damage your overall reputation. Set payment schedules to ensure you have the finances available to pay suppliers. It’s vital you do advanced planning so you don’t face multiple invoices or bills all at the same time without the funds to deal with them.
- Expand at the Right Time. Growing and expanding your business is exciting. It means new markets, new staff members and more revenue. But, a word of caution. Expand at the wrong time or in the wrong way and you’re more likely to have issues in the long-term. Growth requires a lot of cash. Purchasing stock, renting buildings, hiring employees and acquiring computers all takes place before the money starts coming in. If you don’t have the funds available to match your growth, then you’re going to run into problems. Manage your cash flow effectively and you’ll know when the time is right.
- Make Better Plans and Decisions. With an accurate cash flow statement, you’ll know the exact amount of funds you have available at any given moment. This is vital because any plans and decisions you make must be supported by accurate information. If you don’t manage your cash flow carefully, then you could be making bad decisions that put your business at risk. You may feel as though your business is in a strong position but a cash flow statement could show that there isn’t much money coming into the business that particular month. This could be because you haven’t issued invoices to clients. Whatever the reason, with an updated cash flow statement, you’ll know not to make any significant purchases at that time.
Keeping track of your business’ cash flow doesn’t have to be a headache. There are tools and solutions available that can help you to manage all of your finances and make smarter and more informed business decisions.
Get in touch with Wibiway team and we will be glad to support you. We are specialists in project management, business strategy, profitability and digital transformation. Our dedicated application will lead your way to track your KPIs and provide you the means to steer your business to success.
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