Every business owner knows the keys to its success or failure pivot on the same axis—cash flow. Cash flow, at its simplest, is a lesson in supply and demand.
While cash flow isn’t the only indicator of a business’ health, it is an important one.
Developing a cash flow projection is how business owners keep an eye on their financial health. Not that with any cash flow strategy, it’s important to have a short- and long-term plan. The process involves forecasting cash needs, investing money, and identifying shortfalls.
A cash flow statement is understood by its three components:
Operating cash flow (also called working capital) is cash resulting from revenues, gains, losses, and expenses. This kind of cash flow is generated from daily operational activities—such as the sale of goods or products.
Investing cash flow is cash resulting from the sale of property or equipment, the sale of debt, or cash collected from the principal payment of a loan.
Financing cash flow is cash from the reacquisition of company stock or cash dividends paid to shareholders. This cash comes from outside the company.
Improving cash flow management is about looking towards the future. While a business owner cannot control every factor, cash flow management is about knowing when and how to budget, cut down on expenses, and anticipate shifts that will affect the liquidity of cash within the organization.
It means having a plan for scaling economically, unexpected cash shortfalls, and securing relationships with banks and creditors from which additional cash can be sourced if needed.