It is no secret that cash flow is the lifeblood of any business, and learning how to manage this resource properly is a crucial skill. One must manage their cash in a manner there is always positive cash flow to ensure there is no cash crunch. Positive cash flow is an integral part of ensuring the good financial health of any business. A lot of factors impact the cash flow, one important factor being efficient accounts receivable management. Monitoring every cash that moves in and out of your business is necessary. As mentioned earlier, an ideal situation for a business is to have more inflow than outflow. To achieve this, learning about different types of cash flow and their impact on your cash balance is important. In this blog, we will break down each type of cash flow and understand all about positive cash flow. So, let us begin by explaining the term “positive cash flow.”
What is Positive Cash Flow?
Positive cash flow is when a company’s cash inflows exceed its outflows. Simply put, the company has more money coming in than going out. This can be achieved in several ways, most commonly through efficient inventory and accounts receivable management. Positive cash flow is a good thing for any business since it indicates that the company generates more revenue than it is spending. It depicts that the business is maintaining a healthy cash balance. Moreover, it can help a company build up reserves, which can be used in times of need or unforeseen circ*mstances. However, it is important to understand the three main components of cash flow to ensure a positive cash flow. So, let us understand the three main types of cash flows and their importance.
Types of Cash Flow
Following are the three main types of cash flows that a business tracks and analyses to maintain a cash balance and understand its financial standing:
1. Operating cash flow- Operating cash flow measures a company’s ability to generate cash from its core operations. A business cannot pay its bills, expand operations, or make profits without operating cash flow. Generally, there are two types of operating cash flow: gross operating cash flow and net operating cash flow. Gross operating cash flow is the cash a company generates before deducting any expenses. On the other hand, net operating cash flow is the amount of cash a company generates after deducting all expenses, including taxes and interest payments. Both measures are important in assessing a company’s financial health. Gross operating cash flow is a better measure of a company’s ability to generate cash from its operations, while net operating cash flow is a better indicator of profitability.
2. Investing cash flow- The cash flow from investing activities depicts a company’s cash to buy or sell investments, such as property or stocks. A positive investing cash flow means that a company generates more cash from its investments than it is spending. This can be good or bad, based on how the company uses the extra cash. It can be good if a company reinvests its positive investing cash flow into growth opportunities. However, if a company is simply hoarding the cash, it could be a bad sign. Thus, to generate positive cash flow from investing activities, business owners can ensure that they are selling property or stocks for more than they were purchased for or by earning interest on their investments. On the other hand, they can reduce their negative investing cash flow by reducing their investment portfolio.
3. Financing cash flow- In business, cash flow from financing activities defines the net amount of cash and cash equivalents being transferred in and out of an organisation. The main financing activities are issuing and repaying debt, making and receiving equity injections, and dividend payments. Positive cash flow from financing activities is essential to a company’s long-term sustainability, as it indicates that the company has access to the capital necessary to fund its operations and growth. To ensure positive cash flow from financing activities, companies must carefully manage their debt levels and use equity injections wisely. In addition, dividend payments should also be made in such a way that does not jeopardise the company’s ability to continue growing.
4. Understanding the three types of cash flows – operating, investing, and financing activities – takes your financial analysis a step further by helping you easily recognise areas where money can be withdrawn or profits can be reinvested.
Is Positive Cash Flow Really Important?
It is no secret that a positive cash flow is crucial to the success of any business. After all, without money coming in, it would be impossible to keep the business doors open and the lights on. But what exactly are the advantages of having a positive cash flow? One of the most obvious benefits of having a positive cash flow is that it allows you to reinvest in your business. With extra money coming in, you can invest in new equipment or inventory, hire additional staff, or spend on marketing initiatives to drive more business growth.
In addition to allowing you to reinvest in your business, having a positive cash flow also gives you peace of mind. Knowing that money is coming in can help reduce stress and anxiety levels and allow you to focus on running your business rather than worrying about where the next payment will come from. These benefits create a strong case for why every business should strive for a positive cash flow. Ensuring that money is coming in regularly can keep your business up. But how do you actually ensure a positive cash flow in your business? Here are certain steps that can help you in the process.
How to Ensure a Positive Cash Flow?
1. Make a plan: Without a plan, knowing how much money you need to bring in each month to cover your expenses will be difficult. Therefore, making a budget and tracking your spending to clearly understand where your money is going is important. Moreover, this will also help maintain an adequate cash balance in hand.
2. Focus on your customers: Keep your customers happy, and they will keep coming back. This means providing great customer service, delivering on your promises, and always looking for ways to improve their experience with your business. As a result, you will never be short of cash in your business.
3. Manage your inventory: To ensure a positive cash flow, you must also pay attention to your inventory. Do not let your inventory get too low or too high. If you have too much inventory, you are tied up in working capital that could be used elsewhere. If you have too little inventory, you risk running out of stock and losing sales.
4. Get paid on time: Another thing is to make sure your invoices are clear and easy to understand and that you follow up with customers who are behind on payments. The sooner you get paid, the better your accounts receivable management will be, and ultimately, you can ensure a positive cash flow.
5. Use technology: There are plenty of great tools out there to help you maintain a positive cash flow. From accounting software to online invoicing systems, take advantage of the technology available to keep track of your money and make better decisions about where to invest it. Moreover, you can also take advantage of reliable outsourcing companies providing accounting and bookkeeping services and entrust them with your cash flow management.
By following these simple tips and entrusting your cash flow process to an experienced accounting and bookkeeping services provider, you can ensure that your business has a positive cash flow, giving you the financial stability and flexibility you need to grow and thrive.
How Does Cash Flow Forecasting Help to Ensure Positive Cash Flow?
So far, we have learnt that cash is the lifeblood of any business, and maintaining a positive cash flow is crucial. Cash flow forecasting is a key tool in ensuring a business has positive cash flow. Cash flow forecasting involves estimating future cash inflows and outflows based on past performance and current trends. This forecasting can help businesses avoid potential cash shortfalls and take full advantage of any surplus cash. There are several methods that can be used when forecasting cash flow, but one of the most important things is to be as realistic as possible in your estimates. Overestimating future cash inflows or underestimating future cash outflows can lead to serious problems down the road. If you are not already using cash flow forecasting in your business, now is the time to start. However, you can also entrust reliable service providers with your cash flow forecasting. This way, you gain access to a pool of experts who ensure that your business maintains a positive cash flow and also help ensure effective accounts receivable management.
Final Words
Understanding positive cash flow is important for businesses that want to remain financially healthy and profitable. We hope this blog has helped you better understand the three types of positive cash flows, which cover operations, investments, and financing. By managing these areas effectively, your business can better handle its financial health while avoiding common pitfalls like mismanaging capital or running out of funds unexpectedly. You can ensure positive cash flow without putting too much pressure on yourself or your in-house team by hiring an outsourced service provider that offers accounts receivable and accounts payable outsourcing services. This way, you can create an efficient system to manage your company’s finances more successfully than ever before.
