Importance of Cashflow
Cash flow in business determines the movement of money in and out of business. It acts as an informative tool for business personals like managers, creditors, and investors. Cash flow accounting helps in notifying the company on factors such as liquidity, solvency, its value, and market position. Thus, a company needs to maintain a positive cash flow to fulfill various financial commitments.
Why should businesses prepare a cash flow?
A business requires preparing the cash flow in order to:
1. Give prior intimation on any shortfalls in cash balances
2. To check on the affordability of the company to pay employees and suppliers
3. To keep a tap on customer payments
4. For the management of business finance as it paves a way for financial planning
5. Provides a detailed report for outside stakeholders like banks
Cash flow forecasting is an essential aspect of the business, and hence it is necessary to understand the nature of implementation:
Being one of the major affecting factors in cash flow, forecasting receivables is essential for the smooth functioning of an organization. Forecasting accounts receivables also helps to determine the amount of cash expected to be collected and bad debt expense.
Forecasting cash outflow:
This type of forecasting helps to make an estimation of the cost incurred for the purchase of goods. Cash outflow aims to calculate the cash expenses made on administrative and operational works. A few other expenses include the purchase of assets, loan repayments, payments needed to be made to owners, and investment of funds.
Keeping up for contingencies:
Contingency planning in cash flow helps the business to duck any cash shortage. It makes a prediction of any expected reactions and outcomes and thereby makes one business ready to face future business interruptions.
Need to be under the business plan
A standard business plan aims to make a proper projection of cash flow as it gives a clear picture of profit, loss, and the balance left. Thus, this provides a precise prediction of the requirement of money at an early stage. This plan also allows covering the flow of cash in sales on credit, payables, receivables, and inventory.
To know more about preparing the cash forecast tips, contact Meru Accounting today!