Lots of small company owners struggle with poor cash flow, which is caused by high unexpected costs, inadequate customer work and slow-paying customers (Also see Managing Accounts Receivable Could Save Business).
First of all, we need to understand that profit is the difference between expenses and revenue in the Profit and Loss Account. Hence, cash flow is not profit. It is possible for a business to be unprofitable but having positive cash flow and vice versa. For instance, when an entrepreneur deposits his or her cash into a bank account, which enhances cash flow but not profits.
Secondly, cash flow is not working capital, although cash flow and working capital are frequently used interchangeably. The difference is that working capital is the current assets minus the current liabilities. It is the money you can utilise in cash shortages.
Cash flow is the total amount of money streaming in and out of your business. You could have positive cash flow when more money is flowing in than out and your business would be in the black. Contrarily, when more money is flowing out than in, you would have negative cash flow which causes your business in the red. This is certainly something an accounting firm in Singapore can assist you.
Cash flow plays a vital role in:
Making better business choices
Understanding your cash flow helps you to decide. For example, you plan to purchase a brand-new laptop and you find that your earnings far exceed your expenditures at the end of the month. Since you have adequate money, you can make that purchase confidently. Contrarily, you might put that purchase on hold until your scenario improves if you are in the red. In both case, since you always track your cash flow, you have made a wise choice.
Keeping your business afloat
When paying the bills, you need to refer to cash flow to avoid running the risk of closing your doors. Your objective is to maintain positive cash flow and make sure that you always make more than you are investing.
Better money management
Knowing your cash flow assists you to comprehend how you handle your money and what business activities are resulting in boosts or reduces in cash flow. For instance, you found that you have profit come year-end but you have a hard time to cover the expenses every month. Therefore, knowing outflows and inflows helps to determine any issues so that you can solve the situation immediately.
Growing your company
A business requires adequate cash to reinvest—to invest in advertising, buy new equipment and office.
Seasonal businesses
Seasonal businesses generally have marked hectic and slow durations and unforeseeable cash flow. They need to thoroughly handle their cash flow year-round so that they have sufficient money to tide them over throughout the slow periods.
To gain more insight on cash flow statement, check out accounting service in Singapore.