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Cash Flow is a Top Challenge for Small Business Owners

For any business, understanding cash flow is the key to successful financial performance. It’s the one common factor that unites every last for-profit business, irrespective of size, industry vertical, or how well they are funded. From bootstrapped startups to global juggernauts, mastering cash flow is crucial. According to U.S. Bank, 82% of businesses die out because of cash flow problems.

This is especially relevant in the context of SMEs. The harsh reality is that the owner/manager needs to take charge of keeping the company afloat, and fully operational. Often in small businesses, you might not be able to afford the luxury of a consultant or financial analyst. That’s why we’ve put together this comprehensive guide, breaking down everything you need to know about the core concept of cash flow. It describes how a financial analyst would break down your cash flow and help you manage it.

What is Cash Flow?

  1. Cash flow is a measure of the money flowing in and out of your business.
  2. Cash flow is a diagnostic indication that predicts the likeliness of your company remaining solvent. Ζt is the difference between cash receipts from the sales of goods and services, sales of assets, loan proceeds, and investments and cash payments towards operating expenses, direct expenses, the purchase of assets, and paying the outstanding debt. This is an accurate measure of liquidity and financial flexibility.

What are the 3 components of Cash Flow?

Operating Cash Flow

This is the part of cash flow associated with everyday operations. This number shows if your company can generate enough funds to keep daily business activities going smoothly, or expand eventually.

Investing Cash Flow

This has to do with the profits and losses you make from investing in the financial market. Under investing cash flow, you can also include financial details of the funds you spend on equipment, and on purchasing assets your business requires.

Financing Cash Flow

This refers to the cash inflow or outflow that comes from transferring cash from profits to investors or adjusting any loans. Understanding cash flow is the only way you can track changes in your company’s liquid assets. This is how you can tell if your organization will remain financially stable, grow, or do neither. That’s why cash flow is called a diagnostic indicator of your
company’s financial status.

Improving your Cash Flow Management

In order to improve your cash flow management, you should make sure you prepare a cash flow statement. To find out how to do this and more explanation on how to better manage your cash flow, download our Guide to Cash Flow Management today!

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