If the business is like a human body, cash flow is the vessel system flowing in that body. Thus, cash flow will directly affect the existence and development of all organizations and businesses.
Cash Flow is a significant term in finance. Thanks to cash flow information, managers can assess the stability and future development of the business. What is cash flow? How to improve cash flow in your business? Navigos Search-Vietnam's leading headhunting company will provide you with answers through the information below.
1. What is cash flow?
Cash flow is the financial term, which refers to the amount of cash and cash equivalents.
Cash flow is often used in financial analysis statements to show the money in and out in a store, business, project, financial product.
After each accounting period, cash flow is accounted for and reported in detail. Looking at that report, managers will analyze and evaluate the outstanding issues in business activities related to the company's budget. If total revenue is greater than total expenditure, cash flow is positive. If total revenue is less than total expenditure, cash flow is negative. Cash flow helps business leaders have a more reasonable and efficient business plan and strategy.
The definition of Cash Flow
2. Important cash flow terms
Below are some terms related to Cash Flow that you need to know:
Free Cash Flow
Free Cash Flow (FCF) is considered a measure that reflects an organization's performance in generating cash. FCF refers to the cash source generated by enterprises from production and business activities after deducting asset costs.
Net Cash Flow
Net cash flow (NCF) is the total amount of money that a business receives from investment and business after deducting expenses in the organization. These amounts include cash flows from production and business activities, investment and financial activities.
Cash Flow Statement
Cash Flow Statement (CFS) is one of five types of financial statements that accounting departments commonly use when managing a business's cash flow. CFS is a financial statement of changes in cash flow and revenues and expenditures equivalent to the organization's cash flows. Like the income statement, the CFS helps to measure the effectiveness of the financial management of the business.
Cumulative Cash Flow
Cumulative Cash Flow is the term used in projects or businesses. Cumulative Cash Flow is calculated by adding up all the cash flows since the inception of the organization or project.
Important terms related to cash flow
3. Why is cash flow important for every business manager?
If a business wants to achieve success and sustainable development, the first critical factor is managing cash flow effectively. In particular, managers and directors must be masters of this information to apply it well in their businesses.
Close monitoring and management of cash flow will optimize revenue and expenditure and minimize financial risks to avoid losses and bankruptcy. Through cash flow, the head also grasps information about the financial situation to make effective strategic decisions on new investment strategies, expand or reduce the size of the business judiciously.
4. Steps to plan cash flow for businesses
In the process of operating a business, smooth cash flow adjustment is crucial. Therefore, making a detailed cash flow plan helps you give effective directions and balance the sources of income and expenditure for the business.
Make a forecast for cash inflows
Making a forecast for cash inflows helps businesses save checking time after having actual data. The cash inflow of the business comes from the following sources:
- Investment activities: Including money from buying, issuing shares, raising capital, money from investors, interest, liquidation or sale of fixed assets.
Make a forecast for cash outflows
Forecasting cash outflow helps businesses better prepare costs to pay expenses in the business. This cash flow includes:
- Business activities: Paying interest on capital loans, payable to the state budget, expenses for services, marketing, salaries, etc.
- Investment activities: Loans, capital contribution, equipment and infrastructure, purchase of fixed assets.
- Financial activities: Buying issued shares, paying interest to investors, loans, finance leases.
Calculate the net cash flow of the business
The difference between cash inflows and outflows over a period is the net cash flow of the business. Based on this cash flow, the manager will get the positive or negative cash flow to make changes and give the appropriate direction.
Determine the balance at the end of the period
Take the excess and deficit at the end of the period as the basis and compare with the cash balance in the enterprise to make reasonable adjustments. Closing balance = net cash flow + opening balance
Come up with solutions
Analyze and provide solutions to handle deficit or excess amounts. Specifically, if there is a deficit, there must be a solution to balance the cash flow in/out, and if there is excess money, the manager can continue to invest to make a profit.
It's essential to a detailed cash flow plan
5. Effective cash flow improvement solutions for businesses
Every business wants positive cash flow, so finding ways to improve cash flow is always paid attention. To do this, your business can refer to some of the solutions below:
Reduce purchasing costs
Reducing purchasing costs is the first solution to improve cash flow effectively. Compare and consider to find suppliers of raw materials with competitive prices but still have quality to reduce input costs.
Read now: Strong financial management tips for small and medium enterprises
Increase sale revenue
Businesses often choose to reduce prices to increase sales. However, not every business can offer a high discount. Based on the current business situation, managers should consider offering a reasonable discount to stimulate users to buy products and use services.
For this solution, keep in mind that you should only offer discounts on some popular items, not all of them to ensure an increase in sales effectively.
Diversify payment methods
Offering multiple payment methods creates favorable conditions for customers and businesses. Users often choose to pay with credit cards, internet banking services, or banking applications. Thus, don't forget to grasp this.
In addition, businesses should also apply the installment form to attract more buyers. This solution also helps increase sales and improves cash Flow for your unit.
Manage warehouse efficiently
Strict inventory management is essential. If the number of goods in stock is high, it means the business is having problems in the consumption process and working capital. When the old goods do not move out, the new goods have no place to store. If the inventory is high, the business must make an effective consumption plan.
Collect debts
Conduct a check of debts that need to be collected, then find a way to recover quickly to increase capital and stabilize cash flow.
Some solutions to help improve cash flow in the business
Hopefully, the above information has helped you better understand what cash flow is, the planning steps, and ways to improve cash flow effectively for your business.
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