Cash flow is a key factor for any business, whether you're a startup or an established company. It can help you determine if your business is running efficiently and smoothly.
The first step is to identify all your expenses and total business income. Then, subtract your expenses from your total income to determine the cash flow you have coming in.
Revenue
Revenue is an important part of a company's financial health. It helps business owners and managers make wise decisions on employee salaries, product purchasing and other expenses.
Revenue may come from sales of tangible products and services, licensing and royalties or advertising. It can also be derived from non-operating activities, such as dividends and investments.
Governments may earn revenue from fines, taxation and the sale of securities. Universities, charities and non-profit organizations also earn revenue from donations and other types of income.
A business's revenue is recorded on its income statement using the accrual accounting method. On the other hand, cash flow is based on a cash basis and represents the inflows and outflows of cash from a company during an accounting period.
Expenses
Expenses are the costs associated with running a business. These costs are a key component of cash flow and can be broken down into operating and non-operating expenses.
Operating expenses are those that are directly associated with the production of goods or services. Examples of these include the cost of goods sold, advertising and rent.
However, operating expenses can also include administrative and general costs not associated with producing goods or services. These costs can include R&D, executive salaries, and travel and training.
Both operating and non-operating expenses are recorded on an accrual basis. This means they are calculated at the end of each period and matched with revenues reported for the same period.
Accounts Receivable
Accounts receivable (A/R) are funds owed to a company by its customers for goods or services they have yet to receive. They may be from a sale on credit or a subscription or instalment payment due after receiving goods or services.
A business records account receivable on its balance sheet as a current asset. As a result, these assets are a valuable indicator of a business's ability to pay short-term liabilities without additional cash inflows.
Businesses must be careful about how much money they allow their customers to pay on credit, which could negatively impact their cash flow. They also need to consider the specific needs of each customer, primarily how long they typically take to pay.
One of the main reasons for cash flow problems is late payments from customers. If you can keep track of your customers' late payments, you can identify trends and address them before they become serious issues. Keeping an eye on your A/R turnover ratio is also a good way to ensure you're not letting too many payments go unpaid.
Cash in the Bank
Whether you keep your cash in savings, money market, or checking account depends on your needs. Check the minimum balance requirements, monthly fees and deposit interest rates before making your final decision.
Keeping cash in the bank can help you avoid overdraft fees triggered when your account dips below zero. Adding cash to your bank accounts can also help you build a buffer against unforeseen expenses that may arise, such as power outages or medical bills.
In bookkeeping and financial accounting, cash is a current asset comprising currency or currency equivalents that can be accessed immediately. This includes coins, banknotes, checks, money orders, and other securities that are immediately convertible into cash.
Cash is a form of corporate money in a company's bank account. It's a valuable business asset and an important part of the company's cash flow.