According to a study from the U.S. Bank, 82% of businesses that fail are due to a lack of understanding of the impact of cash flow on their business or due to poor management of it. This gives us an idea of the importance for every entrepreneur to know more about this topic.
Let’s start defining what cash flow means, and in simple terms we could say that CASH FLOW is the movement of cash into or out of an account in a certain period of time, it can be a personal account, a business account or an investment account.
Cash Flow works in a similar way for both, a company and an individual. For a person or company to have a financially healthy cash flow, it is generally achieved when the cash inflow is greater than the cash outflow.
There 3 types of cash flows
OPERATIONAL CASH FLOWS
Its cash received (input), or spent (output) as a result of a company’s business activity.
For instance, a company obtains cash by selling its products or services, that cash goes into the bank account and is used to pay for business expenses, such as employee salaries, purchase of merchandise, advertisements, equipment, etc.
INVESTING CASH FLOWS
Its cash received or spent through investing activities.
This is basically the purchasing or selling of assets, which will allow the company to grow.
FINANCIAL CASH FLOWS
Its cash received through sale of shares and/or debt (loans), or cash spent as payment of debt or purchase of shares.
Financing activities include the issuance and payment of shares, the payment of dividends, the issuance and payment of debt, and capital lease obligations.
Why is it so important to know how to correctly manage my cash flow?
If a company or person runs short of money and is unable to pay their obligations, they could experience a cash flow crunch, and if the cash flow crunch continues … this could lead to bankruptcy. For this reason, it is very important that business and individuals manage their cash flow carefully.
TIP: We as business owners must make sure we have enough cash on hand to ensure we can pay on time to our employees, suppliers, creditors and ourselves, this is critical to keeping a business running.
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