Why You Need to Understand Your Business’s Cash Flow

Do you understand your business's cash flow and why it’s so important?

Understanding business cash flow is essential because cash flow is a critical aspect of assessing and managing the financial health and sustainability of the business. Cash flow management is an integral part of professional small business bookkeeping, and here at More Bookkeeping, we have expert Xero advisors on hand to help your business prosper.

Many business owners either ignore financial reports altogether or only take notice of the profit and loss report. However, to get a good picture of your business's financial wellbeing, you need to review the profit and loss, the balance sheet and the cash flow position reports regularly.

Your business may have periods with negative cash flow yet remain profitable overall. Many businesses have cycles or seasons of tight or negative cash flow, which can be very stressful if you haven't planned for it – yet with foreknowledge of your financial position, you can plan accordingly and sail through challenging cash flow periods.

Some businesses fail not because of problems with profitability but because of poor cash flow management. We find that many business owners often operate in a state of unnecessary struggle. But with some assistance and understanding of cash flow issues, they can streamline how they manage business finances and reduce stress, making business more enjoyable.

Benefits of Understanding Your Business Cash Flow

• Monitoring money flow, not just the profit, helps you manage obligations. The more you understand the flow, the better your ability to respond to changes in the business.
• Recognising the patterns of inflow and outflow of money so you know where and when money arrives and leaves your bank accounts. This allows you to plan for expenses, running costs and liabilities.
• Good management of accounts payable and receivable will help with seeing the impact of money in and money out.
• Observing patterns of flow over time gives you more financial data to plan for future periods of difficult cash flow – and to know when you can save or spend excess cash flow.
• Identifying patterns and cycles makes planning easier. Not all cycles and patterns of cash flow are evident until you start studying the monthly reports. Fluctuations in cash flow are normal, but the more knowledge you have, the more you can make more informed decisions.
• Budgeting and forecasting are more accurate with an understanding of cash flow - and understanding cash flow makes budgeting and forecasting easier.
• Being aware of cash flow position month to month helps in appreciating the big picture of your business's financial health and viability.

In general, understanding your cash flow allows you to make better financial decisions by having the confidence that you know exactly how your business is performing.

When you understand your cash flow, you are no longer guessing or hoping for the best but can plan with accurate and current financial data to guide your plans and goals.

Talk to us at More Bookkeeping Xero Advisors about how we can help you get ahead in business. We can help manage accounts payable and receivable, plan for liabilities, and give you monthly reports that will clarify your financial position and make running your business easier.