Cash Flow or cash flow statement reflects the flow of funds in a firm. It is used to determine the state of liquidity or solvency of an organization. It takes into account transactions involving cash and cash equivalents alone. Things like depreciation, bad debts etc are not considered.
Understanding Cash Flow - A Critical Factor in Business Survival
Cash Flow or cash flow statement reflects the flow of funds in a firm. It is used to determine the state of liquidity or solvency of an organization. It takes into account transactions involving cash and cash equivalents alone. Things like depreciation, bad debts etc are not considered. This flow brings into the picture activities in operations, investments and financing.
With the statement that shows cash flow you can have see if a firm's financial health is on a sound footing. You can understand the organization's preparedness to modify the flows based on future demands. It can also be used to compare the performance of different companies' irons effective because the differences that may arise from different accounting methods used. Cash flow statement can be a predictor of flows in future - indicating amount, probability of getting and timelines.
Cash flow can be said to be one of the most crucial factors for business survival. Therefore it becomes necessary to carefully monitor and control all the different parameters that affect the inflow and outflow of cash into a business. A good business plan should include projections at least for one year ahead so that you can plan your strategies and operations better.
To tightly control this flow it is important to have some one dedicated for the associated activities like invoice generation, collection, customer payments, follow-up etc. This becomes especially true in a business to business model where payments typically happen over a period of months after the actual sale.
Having a collection process that works can ensure that your organization has healthy cash flows without jeopardizing customer relations. Your customers can be made to understand that they will get the best of services when they pay on time and if they don't you can have a plan of action that gets the dues back ASAP.
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