We
cannot stress how much the cash flow importance to the health of a business.
Let me quote “revenue is vanity, cash flow is sanity, but cash is the king”. As
a business we would like to see a large inflow of revenue from each sale that
we make, but the focus here should be the cash flow. Many business may still be
operating even they are making loss especially if they can continue to manage
their cash in & outflow, for example, delay payment to creditor so that the
business have enough money to pay any variable cost. Ultimately, without cash,
no business will survive long enough.
When a large or small amount of cash comes to a business, it
is known as “cash Inflow” and this cash inflow come mostly from the sales of a
goods or services activity. “Cash outflow” is the opposite where a business
needs to pay for cost such as transport, labor, raw material and electricity.
The different between both of this is called the “net cash flow” and it can
either be a positive value or a negative value. When a business receives more
money that they spend, it is a positive cash flow which helps to ensure the
sustainability of the business operation.
A negative cash flow is when a company receives less money
than its spending. This may let the business to struggle in paying bills and
create the needs of borrowing money to help in the shortfall. In accounting, a clear indicator of a profit
and loss is that the loss will be shown in a bracket. Well most of company may
have a huge amount of cash reserve to survive; some smaller company may find
this as alerting to them.
These come to a
reason why controlling cash is essential to business sustainability. Management
accountant role will have to be smart in dealing with a range of cash issues
that arise.
·
Make sure that there
is sufficient cash available that is not tying in any unnecessary activity for
future investment.
·
Develop a process and
procedure that help to reduce outstanding debt and making sure the inflow of
cash is higher than spending.
·
Controlling different
level of cash outflow need to be done according to the size of the business. If
your business is a car workshop, then make sure the outflow in buying car parts
is done meeting the company needs and don’t overspend things.
Written by: Hafiz
Hanafi (Comfori Sdn Bhd)
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while profitability is crucial for the long-term success of a business, cash flow is the lifeblood that keeps the business running on a day-to-day basis. Businesses need a healthy balance between profitability and positive cash flow to ensure stability, growth, and resilience in a dynamic and sometimes unpredictable business environment.
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