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Business Tip: Managing cash flow

Jan. 30, 2012 at 4:01 p.m.
Updated Jan. 29, 2012 at 7:30 p.m.


By Kacey M. Lindemann Butler

Cash flow to a business can be a sign of its health or its pending failure.

Simply put, cash flow is the money coming in to a business as well as the money going out. This includes everything from sales dollars to expenditures for office supplies.

By understanding the true importance of cash flow, small business owners and entrepreneurs will be far more ahead of the game.

At the beginning of the cash flow cycle, nearly every business starts out with - you guessed it - cash. But from that point on, the central purpose of the business is to convert that cash into other kinds of assets or to extend it with liabilities and ultimately turn it back into cash again. Only this time, more cash than the business started with.

This process continues repeatedly throughout the life of a business.

The concept of cash flow can be defined in different manners. Cash flow is any kind of income or expenditure that affects the cash accounts. A cash flow must be strictly, financially liquid cash or finances that can be stored in a bank account or in the form of currency.

Cash flow can be broadly divided into two categories, inflow and outflow.

The cash inflow, or just cash flow, is generated as a result of financing and/or sales.

The cash outflow is a result of many factors such as purchases, investments, salaries and any other expenses.

There is a significant importance of cash flow to a business. The following are advantages of positive cash flow:

Keeps You Out of Debt: The timely cash inflow plays a very important role in keeping you out of debt, as a timely inflow of cash prevents you from taking small loans and incurring extra expenses.

Eliminates Unnecessary Spending: The use of cash flow prevents all unnecessary expenses such as piled up interest, late payment charges, etc.

Ensures Timely Payment: Cash flow, in both the directions, ensures two essential payments; the salaries of employees are paid on time and installments of all loans are made on time. This ensures the trust of employees and upholds your credit rating.

Cash flow enables you, the business owner, to plan for those times when sales are not steady. Building up a sufficient flow of cash to ensure your business is able to account for times of the month that expenses are higher than others can take time.

The interesting thing about cash flow is that we tend to not pay attention to it until suddenly we are behind on all payments and don't know when the next sale will happen to cover the debts.

Understanding the welfare of your business requires more than looking at the total dollars coming in versus the total dollars going out.

More times than not, poor cash flow management will certainly cause business failure.

For more information, contact the UHV-SBDC at 361-485-4485, or sbdc@uhv.edu. Kacey M. Lindemann Butler is the senior business adviser of the UHV-SBDC and can be contacted at LindemannK@uhv.edu.

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