Cash is king when it comes to the financial management of a growing company. A healthy cash flow allows you to operate and carry out finance, business and investment activities. Without it, you simply can’t function.So, it makes sense that a prosperous business will have a healthy cash flow statement. But what does this look like exactly? There are several elements of your monthly statement you need to fully understand to gauge your cash flow health. For example, what is the level of money coming in and going out, and does this need to be adjusted?
As a new business owner, you’re no doubt still learning to develop and understand things outside your area of expertise, which can sometimes leave you shooting in the dark. However, good cash flow management is not an area you can simply leave to luck. Getting it wrong can result in costly mistakes so it’s important to get it right.
We know you’re coming to grips with running your new business, so we’ve put this blog together to give you a heads-up on what healthy signs of a strong business cash flow statement look like.
The following key factors establish the health of your finances:
1. Positive cash flow
Does your business create more money than it spends? A healthy business will consistently have a positive cash flow from operating activities. Your net cash should continue to grow over time, otherwise it simply won’t be sustainable, and you’ll have to source outside financing to stay open.
2. Invoices are paid on time
When customers pay on time, the money you’re owed keeps flowing in, allowing you to pay your suppliers. When payments are late, your whole cash flow is negatively affected. As a start-up this aspect is crucial to staying on top of your cash flow. Calculating your acceptable number of debtor days and communicating this to your clients can help reduce delayed payments.
3. Use operational activities to fund growth
The foundation of your business should be strong enough to pay for its own growth. This means operational activities that make up your core business such as manufacturing, distributing, marketing and selling a product should fund the development of your business rather than having to raise additional funds or sell assets to do so. Put simply, a positive cash flow from operating activities should control how much you spend and the cash flow in your investment activities.
A healthy cash flow is fundamental to the performance of your business. Understanding your cash flow operations is vital to knowing how well your business is performing and how you can optimise your current activity. Paying attention to key factors that establish the health of your finances is a good place to start. By following our guide you’ll not only be able to grow your business in the right direction, you’ll also be one step closer to achieving your personal financial goals and creating the lifestyle you aspire to.