What Is a Company’s Cash Flow?

Cash flow is one of the main indicators of a company’s financial situation. It is a financial report that allows you to track the company’s income and expenses for a defined period of time. Cash flow allows you to know the liquidity of your business and to make informed decisions.

It is a key tool for any business. If you properly manage your company’s cash flow, you will be able to assess the financial health of your company. In addition, it is an indicator of your company’s growth and development that you can show to third parties. It also gives you information about your ability to meet your short-term payment obligations.


The Importance of Cash Flow to Avoid Liquidity Problems

Any good investor knows exactly what cash flow is, as it is a very important indicator when assessing a company. However, many business owners neglect to analyze their economic data and do not use this key indicator.

It is important to monitor it, as low cash flow can cause a business to close in the first few months. This is one of the main reasons why businesses close in the first year.

This financial tool allows us to:

  • Assess the financial health of the business
  • Determine if the business needs financing and should take out a bank loan
  • Determine how much material can be purchased
  • Determine if it is possible to pay debts.
  • Determine if the company will be able to meet its short and long term financial obligations
  • Make informed decisions


Having Cash Flow Problems, but Don’t Know Why?

Nearly one out of two businesses do not make it past the 5-year mark. According to Statistics Canada studies, nearly half of all business failures are attributable to internal factors. Management deficiencies are highlighted, such as the inability to manage working capital.

Is your business making profit, but the bank account is still empty? Here are a few avenues to explore:

  • You pay your suppliers on the 30th day, but you accept that your customers pay you in 45 or 60 days
  • You buy equipment, furniture, computers without financing
  • Your inventory or work in progress is higher than usual
  • You often have to pay in advance for your materials, your insurance, your licenses

Looking at your bank balance every day or making sure you have a very low sales collection time is not enough. Of course, these are two very relevant elements, but you have to go further.


Tips for Avoiding Liquidity Problems

  • Doing a budget every three months can be a great way to plan your next investments and see the impact on your cash flow.
  • Calculate your monthly cash flow ratio, which differs from working capital (current assets/current liabilities) because you must subtract from current assets any items that are not readily cashable. For example, a company that still has a product in its inventory that is no longer selling well.
  • Calculate the adjusted sales collection time. Don’t look only at accounts receivable, look at inventory or work in progress as well. This will tell you how long it takes your company to cover your cycle from start of production to collection.
  • Do a thorough check of your payments. Make sure you send your invoices on time and notify your suppliers of any delays in payment.
  • Effective inventory management. It is important to periodically check the inventory and place orders according to the company’s needs.
  • Make realistic projections. When businesses make projections, especially in the first few months of operation, they tend to be overly optimistic. Be sure to consult a CPA to make realistic projections.
  • Save as much as you can on costs. There are many ways to reduce your expenses.
  • Renting equipment and premises in the first few months. Many businesses tend to make large investments at the outset without knowing how the business will operate and what its financial resources will be. It is advisable to lease until you see positive cash flow growth.

You can calculate the adjusted sales collection time, as it allows you to highlight the number of days it takes to get your revenue in the bank. The longer it takes, the more working capital you need. It makes sense, during this whole cycle you have to pay your employees, payroll deductions, rent, etc.

Cash flow management is not the most interesting thing, but it is essential to focus on it. Develop your reflexes by having some key indicators. You will make better decisions and it will also allow you to use financing as a leverage tool and not as a trap.


Need Help Managing Your Company’s Cash Flow?

If you have just started your business or if you wish to outsource your accounting service, Cofinia has more than 20 years of experience in the field to take care of the financial management of your business. Do not hesitate to contact us, it will be our pleasure to guide you.

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