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Understanding cash flow in your business can keep you solvent

All businesses need cash from sales and to make a profit. A business will have a certain amount of cash.  The amount of cash available will give the Directors and shareholders an indication of how prosperous the business is. It is important to have an understanding of your cash flow by keeping track of all cash flowing in and out of the business.

Cash in business is real money, as coins and banknotes, as well as funds in bank accounts, including any overdraft facility any deposits that can readily be turned into cash. Cash is not money owed by your customers, stock or deposits that cannot easily be withdrawn. Cash is not profit, which is the difference between what your business costs, and the total amount that a business earns.

Cash flow becomes crucial as there may be significant time between your business selling items, and it receiving payment from the customer, and you making payments to the supplier. Cash comes in from customers, bank loans, interest, overdrafts. Cash goes out to purchase stock and assets, pay wages, rent and income tax.

You can improve cash flow by applying invoice discounts to encourage customers to pay early or offering credit. You can pay for high-cost items by leasing them rather than buying. Cash flow can also be improved by managing your unpaid debt.

Once you know where cash flows in your business, you can then forecast cash flow over a set period, for example, monthly or quarterly. You need to include a reasonable assessment of expected receipts and payments, and add your opening and closing balances. You can do this on a spreadsheet or using accounting software.

Finally, you can improve your cash flow by making sure do a range of activities to prevent a cash flow crisis. Carry out a credit check on your customers and have a debt management strategy to reduce debt. Make sure you complete your orders on time to ensure you get paid. Improve your marketing and sales strategy to get new customers. Remember to monitor your costs and get advice from your accountant or finance manager on a regular basis.

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