Cashflow management: the basics

Managing your cashflow is vital for business survival and growth. To run your business effectively, you need to balance the timing and amount of your costs with those of your income.

Every business needs cash available in order to pay their bills and expenses on time, so it is important to balance the timing and amount of money flowing into and out of your business each week and month. It is the movement in money in and money out that is your cashflow. 

To understand cashflow, you first have to understand what is ‘cash’. Cash is the amount of money available to your business – including

  • Money in your ‘hand’,
  • Money in your bank account,
  • Any unused overdraft facility and foreign currency and deposits that can be quickly converted into your currency.

Cash does not include any money or value owned by the business that cannot be accessed quickly – eg bank deposits that cannot be quickly withdrawn, money owed to your business by customers, stock or assets.

In order to make a profit, most businesses have to produce and deliver goods or services to their customers before being paid. So it is essential to control your cashflow so that you always have enough cash available to pay your staff and suppliers before receiving payment from your customers. If not, you’ll be unable to meet your customers’ requirements or receive any profit, your cashflow will not be flowing in your own direction. 

It is important not to confuse your ‘cash balances’ with profit.

Profit is the difference between the total amount your business earns and all of its costs, assessed over a specified trading period. You may forecast a good profit for the year, yet still face times when you are strapped for cash.

However, having a lot of cash in your bank account may not always be the best thing for your business. If you have a lot of spare cash available, it can sometimes be a good idea to move it to another account with a higher interest rate, or use it as capital for short-term investments. But the best use of any spare cash is to invest it in your own business to grow your own profits.

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