Is Your Cash Flow Positive Each Month?

When it comes to business, cash flow is one of the most important numbers to keep track of. Without enough cash flow, it's impossible to continue growing your business. But what if you're not sure if your cash flow is positive or negative each month? That's where this post comes in.

What Do You Mean By Cash Flow?

Cash flow is the certain amount of money that flows into your business or property from your sources, like customers, partners, and vendors, minus the money you spend on your business or property, plus interest, tax, depreciation, and other fees.

The general rule is that cash flow should never be negative. However, it's possible to have a negative cash flow if you have a debt or an obligation that exceeds your assets or if you're borrowing money at high-interest rates. If you have a negative cash flow, it could mean trouble.

What Are The Things That Contribute To The Cash Flow Of A Business Or Property?

Let's examine the most important contributors.

Sales Revenue

It's the money you receive from sales or customers. It is usually the highest contributor to a company's or property's cash flow.

Income Taxes

Taxes are the money that companies or properties owe the government. Income taxes are taxes that are paid on sales revenue, rental income, interest earned, dividends, and capital gains.

Costs

These include wages and other payroll costs; repairs, maintenance, and insurance; utilities; and depreciation. Costs are subtracted from revenues to determine cash flow.

Interest Expense

It is the cost of borrowing money. For instance, if you use a bank loan, you'll pay an interest rate on the loan. Interest expense is calculated by subtracting the interest you're paying on your loan from the total interest owed.

Depreciation Expenses

These are expenses that are paid over time, such as the depreciation of machinery and equipment. Depreciation expenses are subtracted from the asset's value to determine cash flow.

Other Expenses

It is any money you spend on things besides the above expenses. Examples are the purchase price of a new computer or a new office chair. Other expenses are subtracted from the value of the assets to determine cash flow.

Dividends and Interest Paid

Any dividends you receive are added to your cash flow. Dividends are the portion of profits that a company pays to shareholders. Interest is the money that banks pay, credit unions, and other lenders.

Debt and Obligation

Companies and properties are often held together with debt and obligations. These are the terms used to describe any money owed. Debt is money owed, and an obligation is the promise to pay back the debt.

Obligations are debts that must be repaid. In order to cover these obligations, companies and properties must have cash coming in to cover the obligations.

What Are The Three Important Tips To Keep Your Cash Flow Positive?

Is your cash flow positive each month? If yes, then it means you are doing well. But if you have negative cash flow every month, it means you are losing money. Your cash flow is affected by many factors such as income, expenses, tax liabilities, and so on. If your cash flow is not positive, it means you have a debt problem. If you have a debt problem, you cannot meet your obligations. It will eventually lead to your bankruptcy.

Before you do anything, make sure your money flow is positive. There are three important tips to achieve this goal:

Tip 1: Make Sure You Are Doing Everything Right

Do everything you can to make sure you are doing everything right. If you don't do things right, then you might lose all your money.

For example, if you receive an unexpected expense, you need to be sure you have enough money in your account. Make sure there is enough money on hand to cover your expenses. Additionally, you must be able to pay for upcoming bills.

Tip 2: Stay Away From Credit Cards

Most people get into trouble because of using credit cards. Credit cards are very easy to use and very tempting to use. Utilizing a credit card exposes you to the risk of excessive spending. You spend more than you have and get into debt.

If you want to avoid these problems, don't use credit cards. You should only use cash or debit cards to make purchases. It is better to pay in cash than to carry a balance on your credit card.

Tip 3: Pay Off Your Debts

It is very important to pay off your debts. It means you have to pay off your credit card, loan, and other debts. Once you have paid off all your debts, you will feel more confident about your finances.

What Are The Types Of Cash Flows?

Cash flow is the amount of money coming in minus the amount of money going out. In other words, it's the amount of money flowing through the business.

There are four types of cash flows: operating, investing, financing, and nonoperating.

Operating Cash Flow

Operating cash flow is the money that comes in from sales minus the money that goes out in costs. It is the primary source of revenue. It's the primary source of money coming into your business, so make sure it's high.

Investing Cash Flow

Money received from loans less money spent on expenses is known as investing cash flow. Investing cash flow is one of the first things you should look at when analyzing your financial situation.

Financing Cash Flow

Financing cash flow is the money that comes in from the sale of a business minus the money that goes out in payments for debts. Financing cash flow is usually lower than other types of cash flows.

Nonoperating Cash Flow

Nonoperating cash flow is the money that comes in from rental property minus the money that goes out in property expenses. Nonoperating cash flow is an important part of your overall cash flow picture.

The sum of operating, investing, financing, and nonoperating cash flows must equal your operating revenues (the amount of money that comes in from sales).

Calculating cash flow will show you that it is always a positive number. However, not every company has a positive cash flow every month. Some companies have negative cash flow, so you can't assume that they will always have positive cash flow.

How Does Cash Flow Affect Your Business?

A key element in determining your business's success is cash flow. If you don't have a good idea about the amount of cash you are receiving and how it is spent, you will not be able to make sound business decisions.

Having a good idea of your cash flow helps you to make effective business decisions. It aids in your comprehension of the amount of cash that is available for your company to use at any particular time.

For example, if you have decided to purchase a new machine for your business, you must first calculate how much cash you have. You can then compare that amount to the amount that you would need to purchase the machine.

Your cash flow also determines how much you will have to pay for your next project. You will need to borrow money from your bank if you have a bad cash flow. You can pay for your project yourself if you have a good cash flow.

Here are some other things that your cash flow can tell you:

• How much money is needed to pay off debt
• How much money is left for investment
• How much money is left for retirement
• How much money is left to pay your employees
• How much money is left for taxes

Reasons Why Businesses Suffer
Negative Cash Flow

Maintaining positive cash flow is one of the biggest challenges in business. Here are some of the reasons why a business may suffer negative cash flow.

Poor Planning

If you don't plan your budget properly, then you can suffer negative cash flow. If your expenses exceed your income, then you will need to cut down on spending, or you'll have to raise your prices.

Bad Accounting Practices

If you use poor accounting practices, you can suffer negative cash flow. It's better to make a record of all your expenses and record them in the correct accounts so that you can see what your spending is like over a long period of time.

Incorrect Management

If you're making mistakes in managing your business, then you can suffer negative cash flow. Verify that you have enough employees to handle your workload.

Failing To Make Money

Some businesses don't make money. There are some businesses that never really make any money. If you're not making money, maintaining positive cash flow can be tough.

Poor Product

Some businesses make a profit from selling products. However, some businesses make a profit from selling services. You might find it difficult to make a profit if you're selling services.

Unclear Pricing

It's important that you set out your pricing structure. You can suffer negative cash flow if you don't set the prices correctly.

Low Or No Customer Demand

Maintaining positive cash flow can be tough if you don't have enough customers. You'll need to find new customers.

Unprofitable Products

Some businesses sell products that aren't profitable. You can lose money by selling products that aren't profitable.

High Costs

Some businesses spend more money than they earn. They pay high wages, buy expensive equipment, and employ a lot of staff. All of these things can cause your business to suffer negative cash flow.

Low Sales

You can struggle to maintain positive cash flow if you sell lots of low-margin items. You'll need to look at ways to sell higher-margin items.

Overhead Costs

You can suffer negative cash flow if you spend a lot of money on things like rent, insurance, utilities, and even employee benefits.

What To Do If Your Cash Flow Is Negative

Each month, your cash flow should be more than zero. A positive cash flow means you can cover all your expenses and meet the bills. If you don't have enough money coming in to cover all your expenses, your cash flow will be negative.

If your cash flow is negative, there are some things that you can do to improve it:

1. Work To Increase Your Income

If you're having trouble making enough money, then you need to make a plan to increase your income. If you're new to self-employment, it may seem like you're out of luck. However, there are a number of things you may do to boost your revenue.

2. Work To Reduce Your Expenses

If you can't get your expenses down, you'll probably have a negative cash flow. If you can reduce your expenses, you can free up some of your income so you can use it to pay your bills.

3. Put Money Away

If you have the discipline to save some of your income, you can use that money to increase your income in the future.

4. Consider A Loan

There may be times when you don't have enough money to pay your bills. In these cases, you may need to consider taking out a loan.

5. Try Something New

Every business owner knows that nothing lasts forever. So, if you're feeling stuck and think you've tried everything, it's time to try something new.

6. Ask For Help

Sometimes, the problem with your cash flow is that you don't have a clear vision of what you're doing. If you feel like you need help, then it may be time to ask a trusted advisor or someone else to help you.

7. Hire A Bookkeeper

It may seem like this isn't a big deal, but hiring a bookkeeper can actually help you keep track of your money. Hiring a bookkeeper will also help you figure out which expenses are worth paying and which aren't.

8. Think About Cutting Back

Even if you have a positive cash flow, you may not be happy about it. You might not be saving enough or spending too much money.

If you've already tried these tips, then it may be time to think about cutting back. You could cut back on your expenses, find ways to increase your income, or even reduce the amount you spend.

9. Think About Reducing Your Debt

If you're using credit cards to cover your expenses, then you're probably carrying too much debt. If you're trying to reduce your debt, then you need to pay off your debts as quickly as possible. You can also work on paying off your debt at a lower interest rate.

Ending Remarks

Examining your cash flow and ensuring that it is positive each month is the greatest approach to keep your company afloat and on course. If you are not making enough money, then you need to find ways to increase your income.

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Written and Published By The Strategic Advisor Board Team
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