An old adage says: “revenue is vanity, cash flow is sanity, but cash is king.” In other words, just because a business appears profitable on paper doesn’t mean it isn’t on the verge of bankruptcy as well.
Contrary to popular belief, cash flow is not the same as paper earnings. While earnings only provide information about money coming into the business, cash flow is a statement addressing how a business receives money (from its sales and investments) as well as the ways in which it spends money (on operating expenses, capital investments, taxes and interest). In other words, cash flow is more than just measuring over-the-counter revenue.
If your company isn’t doing a good job of managing the amount of cash entering and exiting, you may be setting yourself up for failure. A business will struggle to keep its doors open if it lacks the cash to manage operations and cover day-to-day liabilities. In fact, a report by the Small Business Administration reveals that 28% of businesses that declare bankruptcy report that a problematic financial structure is to blame. If you want to give your business the best shot at succeeding in the coming years, it’s crucial that you learn to measure and manage all incoming and outgoing cash flow effectively.
While cash flow is clearly one of the most vital financial metrics for a business to track, not all organizations need to use every method of measurement. By understanding the strengths, weaknesses and applicability of each of method of measuring different types of cash flow, small business owners can avoid becoming just another statistic.
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